Government as a VC

What does this mean? Well, I have been thinking about the auto industry bail out plan by our government and I have an alternative to that plan, let the government become a VC in a high tech industry.

Some of you may not be aware that our government is going to spend $17.4 billion on automobile industry, in a form of a loan, so they can be more competitive. I believe this is such an old idea and there is a better alternative. My solution is simple, let the government become the VC for the high tech industry and reap the benefits from it, rather than using it to rescue an obsolete economical engine for the second time in 25 years. What did that last bailout get us? More money spent for automobile companies, who can’t seem to manage their money is not a good idea.

Let’s compare that to the high tech industry around Silicon Valley. The entrepreneur spirit here is high. We do more with less than most industries. High tech is one of primary reasons whey California has top 10 economical power in the world, not the nation but the world. We do things a bit differently here at Silicon Valley.

First, money would be better spent where it counts the most. Let me share some of the numbers. Here are the revenue numbers from some of top 50 companies from Fortune 500 list between 2001 and 2008 in $million.

Name             2001           2008
GM              $177            $182
Ford             $162            $172
IBM             $85            $98
HP              $104            $145
Dell              $31             $61
MS              $25             $51

As you can see, high tech sector, while smaller than combined auto industry, had a much faster growth. High tech companies are influencing the market more and more. The future of the market will not be dictated by the old industry like auto, steel, textile, etc. I am a firm believer that the new industries, like high tech, green and biomed will be the market of the future.

So, if I was a money manager, which I believe the US government should be acting like, I should invest in the industry that has faster growth rather than one that’s slowing down. It’s like betting on the vacuum tube industry when the transistor is taking off like crazy, as it did in the 60s.

Second, the ROI for the government will be much higher investing in the high tech companies than auto industry. With the current prime rate approaching zero percent, the loans government will give to auto industry will bring in very little, if any, long term interest for them. Why lend money to someone for next to nothing, even if you are bailing them out? Why not spend the money more wisely and invest it in the faster growing industry? If the government acted as a VC and took equity in the company, their ROI would be much higher. Even if  90% of startup companies fail within 2-3 years, the remaining 10% will thrive and provide overall return of 25-40%. That’s better ROI than giving the money away in a non interest loans. Although there are some that wants to create a government oversight committee to manage the auto industry, no one is talking direct investor role. I think if the government can be the direct investor and give fraction of the bailout money to the high tech industry, it will be win-win situation.

Lastly, the government is investing the future. Although the high tech industry is highly innovative and still has an edge over the world, more and more of the new ideas are coming from overseas. The government is doing very little to improve the education system or incentives for companies to keep the edge. This “stimulus” plan would stimulate the innovation within the US. The research area in the US educational system is second to none. However, taking the idea from research in to development has been always slow within the US without the government assistance, like most of the other countries do. You don’t have to go far to see some of these initiatives around the world, semiconductor technology in Taiwan, Telecommunication/Cellular technology in Korea & Finland and LCD technology in Japan. They all had assistance from government to get their technology off the ground and they are now the leaders in each field. If the government assisted some of more innovative companies in the US, the innovation leadership will continue. We need to take advantage of the technology research and make it in to a product/service that will drive the economy, not be like the Xerox and GM and lose the edge to others like Apple (mouse and GUI) and Toyota (Six-Sigma, TQM).

If the government has to choose between growth and bailout, I hope they make the right choice and bet on the right side and not waste our tax dollar on the wrong bet.