Silicon Valley and the entrepreneurship it fosters is different because it thrives on adversity, on making much out of little. This is why Sarah Lacy is right to rebuke Thomas Friedman's suggestion that the U.S. government should bail out venture capital firms:
Friedman further says in the column that "Bailing out the losers is not how we got rich as a country, and it is not how we'll get out of this crisis." Agreed. But what country got rich by bailing out winners? Is that even a concept that makes sense? I can't imagine a greater a waste of shareholder money than giving it to people who don't need it and aren't asking for it....
The reason recession-born companies are so inventive and daring is because founders are forced to work within constraints, precisely because it is harder to raise capital. Nothing kills a great idea like too much cash. Unless it's a flood of too much taxpayer cash, because then we all lose.
Somehow, somewhere, someone decided that government was the answer to the economic crisis, conveniently overlooking government's complicity in encouraging the U.S. consumer to consume far beyond the boundaries of common sense. But I don't blame government for my problems. Nor do I ask it to bail me out.
I certainly don't expect the government to bail out venture capitalists, a group that has not asked for government money and would almost certainly chafe under its strictures. These are people that ostensibly get paid to take risks. The system fails if the VCs can simply get fat on government money.
In many ways, it's already failing due to too much institutional investor funding. Too much money is chasing too few deals is the increasingly conventional wisdom. We need venture firms to fail. We need money to settle into the most intelligent and hungry investors' hands, rather than being shoveled into the pockets of paltry hacks that know how to collect a management fee and little else.
The Gordon Gecko character in Wall Street proclaimed that "Greed is good," but the reality is that "Greed mitigated by failure" is better. We want ambition. We also want poorly executed ambition punished.
That's what makes Silicon Valley great. It's also what made the United States great. We get the air knocked out of us and we get back up. But that initial pain is critical to the recovery. The more the government and others try to soften the acute pain of loss, the less we will strive for gain.
I've found this to be true in my own life. When I told my father that I was planning to go to Brown for my undergraduate studies, he replied, "That's great. Who is going to pay for it?" I went instead to BYU, which gave me a scholarship.
Later, when my wife and I were living in England for my Masters program, I called my mother to get some financial back-up (which she had been giving all along to make it possible for me to study there). She told me 'No." That 'No' proved foundational in forcing me to pull myself up by my bootstraps, as it were, and become self-sufficient.
In like manner, we shouldn't bail out VCs. Let them fail. That's the best way to ensure they'll succeed.
Follow me on Twitter at mjasay.
Apparently, even technology companies want a bail-out.
Recently, the CEOs of Google, IBM, and other technology companies converged on the White House to lobby President Obama for key measures like broadband investments to be included in the U.S. government stimulus package. It's one thing to see U.S. auto makers, perpetually inefficient and ineffective in the market, begging for government hand-outs. It's quite another to see the leaders of the world's most successful technology companies seeking the dole, as well.
Google CEO Eric Schmidt made it clear what he hoped to gain from his government intervention in The Wall Street Journal:
Eric Schmidt of Google Inc. said in an interview that he appreciated the emphasis on renewable-energy technology and the deployment of broadband services. "All of that is a real positive for [Google]," he said. "The things that we asked for are in there."
I'm sure they are, and many of them are likely worthy government investments. But with the U.S. in a deep recession after decades of profligate consumer and business spending and subsequent debt, why are successful companies like IBM and Google lining up to help further indebt the government to the tune of nearly a trillion dollars?
We can do better than this. The technology industry has traditionally thrived in the absence of excessive government oversight or involvement. In Silicon Valley, where Ayn Rand's Atlas Shrugged is considered a libertarian Bible of sorts, it feels wrong to see its industry leaders seeking a stimulus that will do more to help these particular companies than the larger technology industry, an industry that does just fine without government bail-outs.
The way out of the recession is to accept that our past mistakes will of necessity be painful, and let prices drop until they hit the point that debt-struck consumers can afford to spend again. It's not to prop up dying industries, or even healthy industries, with fiscal stimuli that mostly stimulate government, as Daniel Henninger points out in The Wall Street Journal, and government lobbyists, as a recent Foreign Policy article highlights, not businesses.
Business are stimulated by real customers buying real products in the midst of real competition. This is the very type of competition in which technology has thrived. Google doesn't need the U.S. government to buy into its broadband and renewable energy proposals to grow. It needs to continue to strike at Microsoft's jugular. IBM doesn't need to feed at the stimulus trough, either: it needs to continue to expand internationally and invest in making its bloated enterprise products lighter and easier to use.
We, the technology industry, don't need government bail-outs. We need to get lean and compete hard.
Give someone a blank check to the tune of hundreds of billions of dollars, and it's amazing all the good that they can (purport to) do with other people's money.
Dean Baker, co-director of the Center for Economic and Policy Research, has put together his own list of bailout proposals, which included $2 billion to help fund open-source software makers.
Such a proposal should make open-source advocates like me happy, right?
Wrong. Open source is doing just fine without a government stimulus. In fact, I'd argue that the easiest way to discern a thriving industry is to check on how much money it has to beg off the government. Open source gets some government encouragement (depending on the government), but little to no government cash (depending on the government). Verdict? It must be doing OK.
Government stimuli can do the opposite of what is intended, fostering disincentives to productivity rather than incentives. That's why I (mostly) like IBM Chief Executive Sam Palmisano's suggestions on how to spark the U.S. economy. He doesn't ask for bailouts. He asks for smart touch-ups to our infrastructure, including broadband.
Does open source offer a great way to take advantage of an investment, such that the government conceivably would get more out of its investment than it puts in? Sure. But open source ain't broke. Let's not try to fix it, especially through government means. I worry how that would skew the incentives that are already working to make open source one of the top three forces in technology today.
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