Bidiversity

The following are excerpts from an article that appeared on TechCrunch…

This is a guest post by Vivek Wadhwa, an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Executive in Residence at Duke University. Follow him on Twitter at @vwadhwa.

Back in 1986, when Bill Gates was still making sales calls, he pitched my group at First Boston on why we should bet the farm on Windows. Despite the risk involved, we gave his fledgling startup the deal. This wasn’t because of his financial backers (he didn’t even drop any names), but because we believed in his vision and nerdiness. In the same way, Google became a huge success long before the deep pocketed VC’s arrived to ride Larry and Sergey’s coattails. They simply had a great technology and winning strategy.

So I’m miffed by the National Venture Capital Association’s (NVCA) claim that companies like Microsoft and Google “…would not exist today without the funding and guidance provided during their early stages by venture capitalists.” And I’m amused that the NVCA claims credit for creating 12 million jobs and generating $3 trillion in revenue (that’s only 21 percent of U.S. GDP). In the software industry (which includes Internet/Web 2.0), they stake claim to 81% of the all jobs created. Yes, 81%. Can they please give the entrepreneurs who risk their life savings, max out their credit cards and put their families in the back seat a little more credit? We’re not talking about divvying up the company’s stock here, just a pat on the back.

I just completed a research project in which we interviewed the founders of 549 successful companies in several high-growth industries – the ones VC’s are most likely to fund. We selected companies that had made it out of the garage and were generating real revenue. Guess what? Hardly ten percent of the serial entrepreneurs took venture money in their first startups. In their subsequent launches, the proportion who took venture money went up to a quarter. In other words, three-quarters of even the most experienced entrepreneurs didn’t rely on venture capital.

The NVCA report also touts all sorts of statistics about how their investments outperformed the overall economy. But this isn’t what Kauffman Foundation’s Paul Kedrosky found when he researched the Inc. 500 list of the fastest-growing private companies. His study determined that from 1997-2007 venture industry lagged the small-cap Russell 2000 Index by 10 percent (this includes returns from the dot-com hey-days). What’s more the study found that only 16 percent of these 900 companies had venture capital backing. And less than 1 percent of the 600,000 new employer businesses created in the United States every year obtain venture capital financing.

What’s behind the NVCA’s voodoo economics? Even though they vehemently deny it, VCs are looking for bailout money and tax-breaks. After spending so much time, energy and breath in the past decade arguing that government subsidies distort markets, now the wealthy, bloated VC community wants its own handouts.

My VC friends complain over drinks about a new breed of VCs who are crowding out the really smart and experienced. These gold digger VCs bear MBAs and have no real operational experience but plenty of taste for IPOs. (Interestingly, if they don’t have an MBA, they have a law degree. Go figure.) With all this dumb VC money sloshing through the system, VCs end up funding hordes of “me-too” companies. This leads to declining returns and high startup failure rates. Everyone loses.

What we need to do is to apply the same rules to VC’s which they impose on their companies – force them to make tough choices and get their business models in order. And instead of giving the tax-breaks to the middlemen, let’s give these directly to the entrepreneurs who take the risks and create the innovation. It is the entrepreneurs who fuel the economy, not the venture capitalists or investment bankers.