— The polite term is "VC-funded R&D," though the cruder descriptions — "Daddy co-signs for the loan" and "TFT" (Testicle-Free Transaction) — are a lot more accurate. But whatever you call it, this innovative new funding model may be the key to getting high tech out of its current investment doldrums.
The problem is not a shortage of investment capital, but of capital being invested. Venture capitalists are sitting on mountains of money these days. Hell, they're turning down new cash every day. The problem is that they aren't investing it. Burned by the dot-com bust (which was largely their fault), and seeing no IPO end game for their current investments anytime in the near future, VCs have become embarrassingly risk averse.
This general gutlessness comes in several forms. Though money continues to be offered by institutions, high-tech VCs, especially in Silicon Valley, have grown wary of establishing new funds. And though the rate of investment has largely come back to mid-1990s levels, the cost of that money has become exorbitant: a typical Valley VC these days wants so much of the company in exchange for its investment that only the most desperate entrepreneur would ever say yes. And you can almost forget about early stage, much less seed round, investments. Plan on mortgaging your house.
And the VCs aren't the only ones who've come down with a bad case of risk aversion. A few weeks ago, I sat through a presentation by a start-up company before a well-known group of Silicon Valley angel investors. The new company had thousands of customers, a major new contract, and was on the brink of profit, and needed less than a million bucks to get into the black. All in all, the kind of start-up investors used to dream of. And yet, after extensive grilling and several call-backs, the company didn't even get a dime. In the end, they found most of their money in Southern California.
A few days later, I ran into the founder of the program at a cocktail party. When I asked him what happened, he shook his head in dismay, "I don't know what it is, but nobody wants to take chances right now. It's very un-Silicon Valley."
The New Gutlessness
Indeed it is. And this New Gutlessness poses a major threat to the future health of the U.S. economy. For the last quarter-century, most of the new job creation in the United States has been product of young entrepreneurial ventures. And most of those have been in high tech. And most of those have been founded in Silicon Valley and the other tech enclaves around the country.
Thanks to wary and parsimonious investors, and the resulting shortage of available capital, we are at a very great risk of losing an entire generation of new technology companies. Recessions are always the best time for starting new companies: there's lots of talent available thanks to layoffs, you've got plenty of free time, your biggest competitors are distracted, you can operate under the radar screen because the press is looking elsewhere, and you've got time to get your product to market.
But to do all of that, you need money. And if the money isn't there, you'll never make it.