Uncle Sam is disrupting the venture capital world
Biden is tying startup funding to his national and social policy priorities. That’s probably an improvement over Silicon Valley values
Higher interest rates, slumping stock prices and corporate America's shift in focus from growth to profitability has taken the air out of one of the main drivers of innovation and new company formation in recent decades: tech startups funded by venture capital . At the same time, the US government passed a host of bills last year that create new funding streams for manufacturing and technology industries — with strings attached . As a result, economic growth this decade could be driven less by Silicon Valley values and more by the values of the administration setting the terms for the new funding.
As we follow this shifting funding regime, it's worth thinking about what's diminishing in importance — Silicon Valley culture — and what came out of it over the past 20 years. Venture capital is an inherently risky endeavor where most new company ideas fail, so for a VC fund to justify its existence it needs its few winners to be enormously successful.
Imagine a fund that invests in 10 companies, and over five years seven eventually fail, one produces returns of 10% per year, one triples in value, and one increases in value by tenfold. That would lead to an overall return for the fund of just under 10% a year before deducting any management fees. Respectable, but not exactly stellar for the risk and illiquidity involved. That shows why the winners need to have lottery-like outcomes in order to pay for the inevitable failures.
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It also explains why bold ambition is so embraced and why eccentricities are celebrated, or at least tolerated. Founders were given free rein to shape the cultures of the companies and industries they were creating. It's hard to create multibillion-dollar companies out of nothing. If two startups are pursuing the same idea, the more aggressive one often has the best chance when there is room for only one or two winners.
That approach has led to the growth of many great companies, but it has produced some epic failures as well. After Softbank Group Corp. invested in WeWork Inc., its CEO Masayoshi Son told WeWork's then-CEO Adam Neumann that "you are not crazy enough," encouraging the cash-burning company to be even bolder in the pursuit of its vision.
While Silicon Valley has had a lot of successes, it's fair to argue that the economic growth and societal benefits it produced were fairly narrow, with the winners mostly being young, tech-savvy workers on the West Coast. Business focus areas too often revolved around things like online ads, e-commerce and food delivery. The negative effects of the grow-at-all-costs mindset — exploiting independent "gig" workers and playing fast and loose with financials — seemed to be accepted as a necessary byproduct of success.
The infrastructure bills and funding streams passed by Congress last year are in part a response to the perceived shortcomings of that venture-capital model and Silicon Valley culture. Projects will only get funding if they're of national importance — building semiconductors, addressing climate change, facilitating the transition from fossil fuels to renewable energy. Benchmarks for success aren't as intense as venture capital requires, giving companies more time to pursue their ideas.
And as the Biden administration this week rolled out details of its US Chips and Science Act, the standout feature of the plan was all the strings attached to the funding. Companies accepting money in the program will have to ensure adequate child care for employees and accept restrictions on dividends and stock buybacks. There are environmental requirements as defined by the National Environmental Policy Act. Companies taking any kind of government money will have to abide by prevailing wage laws as defined by the Davis-Bacon Act.
It is being seen by many as an attempt to shift economic growth from shareholder capitalism to stakeholder capitalism — conducting social policy under the guise of industrial policy.
Whether or not this shift to government-influenced investment ends up being successful may depend on your perspective. If your priority is an economy where employers provide child care, pay a living wage and prioritize stakeholders other than just shareholders, you'll probably be satisfied whether the activity generated by government funds ends up being productive and efficient or not.
But it remains to be seen whether these Biden plan investments will lead to the kinds of cost-conscious innovation and productivity gains that will power economic growth, as advocates suggest. Because I'm an optimist, and because many of these ideas have been starved of capital for so long, I see a better chance for at least some success. But we should be on guard against the potential of the programs to turn into boondoggles over time — the industrial policy version of "bridges to nowhere" that serve narrow political interests more than broad societal interests.
Conor Sen is a Bloomberg Opinion columnist. He has been a contributor to the Atlantic and Business Insider.
Disclaimer: This opinion first appeared on Bloomberg, and is published by special syndication arrangement.
