Tom Friedman wrote about week ago that the gov’t should give $1b apiece to 20 top VC firms.  A lot of VCs, like Fred Wilson, disagree.  He says there’s already enough capital for VC to fund the types of startups they want to fund.    

Trying to find a panacea for stimulus that solves all problems is off base. VC is just an investment class that only invests in certain types of companies — ones that can make a 10x return or more on investments of $2-25m in size.   Wilson advocates angel tax breaks and small business administration financing.

VC-funded companies do create jobs, but not jobs for everyone at all levels of subsistence.  In fact, to make a 10x return, companies have to be run lean.  They create profits rather than jobs.  And most of the jobs they create are ones for people that wouldn’t have too much trouble getting a job.  And, sure, that’s all good, in the long term it’s good.

Short term jobs need to be created, and not all that many will be created from VC-funded startups.  Major segments of the American economy are being displaced with no jobs in sight.   Take, for instance, the sensational NYT article about the $150k manager that’s working as a janitor for $10/hour.  That’s much closer to the problem.  The problem being people that want to work, have the capacity for it, cannot get hired, as the jobs they used to hold have evaporated.  All in the name of profits and capitalism, any corporation trying to hit it’s ROE number is going to outsource to cheaper labor markets.  And after 20 years of that (all facilitated by telecom and pcs), we’ve managed to create profits and billionaires, but we’ve lost a host of labor intensive white collar jobs (e.g. no more bank tellers, customer service reps, office assistants, middle managers).  Unfortunately, investment profits are several degrees of separation away from W2 forms, reestablished credit, and new buyers for vacant homes.  

And thanks to Greenspan, not unsupported by the Bush Administration, handing money to Americans in lump sums via equity loans, easy credit and low interest rates (post 2000 crash) wasn’t exactly a long term job-creating strategy either.  Oops.

Solving this problem takes creating new avenues to hire these people AND letting them hire themselves.  Some new employment will be from the growth that’s still happening for tech and health care companies, hard to argue with.  But many will only have opportunities in small business.  A lot of Americans are not trained to think like entrepreneurs — they get jobs, lose them, collect unemployment.  A growing number of people only have opportunities working on their own (freelance, street vendors, day labor, childcare) and they know first hand about no health insurance, no unemployment benefits, losing their jobs with zero protection, investing in their own businesses to just have the basics like a laptop and cell phone.  

To solve any meltdown, it often takes much more than one solution.  We need more than just handouts in the form of extended unemployment and big corp bailouts.  Given that, it wouldn’t hurt to give a bit more dosh to VCs.  Yet, before all of these Geithneromics, small business finance stimulus has the potential to hit a jugular with greater speed.

That said,  small business finance programs ($10-100k investments) must be incredibly involved, more than cash.  Small business finance groups ideally need to grow community and support networks, and attract media coverage.  Jobless people who will be starting their own businesses or becoming independent contractors need help, advice, the wisdom of previously successful entrepreneurs.  Everyone wants hardworking people to be able to work — it’s just if that person was trained as something like a call center manager, there’s going to be some transitioning of skills.

So stimulus focusing mostly on damage control and investor profits is misguided.  At best, investor profits couldn’t help vast numbers of unemployed for a long time.  Most likely, that profit capital will cycle back into overbought Treasury notes, the stock market, hedge funds, more VC, and high-end real estate.  

For certain, there will be a huge growing work force that could do a lot by simply creating businesses in their local community.  They’ll need help — reliable business opportunity suggestions, loans and equity, training.  

How about some stimulus for support systems and capital for new small businesses and the self-employed?  Unlike VCs, I doubt there will be too many beneficiaries saying “no” to that.   Perhaps some of those wealthy fund investors want to diversify some cash out of VC and hedge funds?   Nah, that’s too risky, let’s get back to saving AIG, shall we.

- Jennifer