Does Venture Capital Equal Economic Stimulus?

With the economy slumping I've been reading a steady string of articles lamenting the state of venture capital.

People who used to invest have less money to do so and are more nervous about risk making it harder for startups to get funded.

And those startups that have been funded seem less likely to get acquired and therefore VCs are less likely to realize their usual returns on investment.

Now not all of this is bad as some people have pointed out that adversity can drive companies to become more efficient and more focused on profitability and building sustainable businesses than trying to build as big as fast as possible in order to get someone to write a big check and buy it all up.

But there's no denying that the trends towards tightening VC funds is a net negative as it likely means fewer companies getting funded and even companies with funding not being able to get more, and this in turn means less expansion, less hiring, and therefore less job creation. So in other words, basically the opposite of what the economy needs right now.

While there's a lot of talk about using an economic stimulus package to invest in infrastructure and to help loosen up credit for existing companies, there hasn't been as much talk about what the feds can do to support startup companies.

Well hopefully that's all about to change as the UK just announced a stunning new program to create a $1 billion emergency venture capital fund to help spur the growth of startups in their country.

Interestingly, they think they'll be able to finance it by attracting private capital, so here's another example of how government can play a proactive role without that meaning necessarily writing big checks. That said, even if they were just writing a big check this seems like a really good idea.

Now let's put this in perspective for America. Our GDP is roughly 5 times bigger than the UK's. So if we wanted to follow their lead but at the scale needed for our larger country that'd mean creating a $5 billion venture fund.

That's actually not a lot of money. In fact, $7 billion in VC money was invested in the third quarter of '08. But even still it could help lay the groundwork for the creation of thousands, if not eventually millions, of jobs. And these would be new jobs. I'm definitely a big proponent of supporting new ideas as much if not more than trying to maintain the status quo.

That said, what I'd rather see is the VC industry wake up and realize that it has to change the way they do business. If some VCs are backing off, that means there are opportunities for other VCs to step in and fill the void. And while these may be uncertain times and we'll essentially need to be creating a new model for VC on the fly, just because it'll be hard doesn't mean it's impossible or that we should try to get it done.

I'd like VCs to start prioritizing sustainable long-term business models over those that try to get big quick and then sell out. I'd like to see new models for VC where they don't just offer money and expertise but also other resources like office space and customers (I'm talking to you on this last one, telcos!). And it'd be terrific to see other VCs follow the lead of Charles River Ventures QuickStart Seed Funding Program that lowers the barriers to new companies getting funding.

In lieu of this, though, we may have to consider government intervention. Luckily until that decision's made we'll be able to watch what's happening across the pond to see if a government-sponsored VC fund is a good way to get companies funded and the economy growing.