State funded startups

Some weeks ago I remarked on a trend I saw at TED and also at SXSW - "not for profit" startups emerging in general, many in spaces where a few years ago you would have seen commercial entities. My hypothesis of the time was that:

- The standard "Freeconomic" based business models were shown to be bankrupt (ie they are de facto not for profits anyway)
- There is much less VC funding now, the State is the new moneybag
- There is less regulatory oversight of NGOs, allowing all sorts of profitable games to be played

A Wall Street Journal article today picks up on the trend:

While the lion’s share of the federal largesse will go to current Internet service providers or other established tech firms, venture investors are urging their portfolio companies that make everything from networking gear to mobile software to get a slice of it as well.

More than 2,000 requests for meetings have poured in to the Commerce Department as it crafts the final rules for disbursing the money — among them, many venture-backed startups. Venture financing has fallen off a cliff of late, with $5.4 billion raised in the fourth quarter of 2008 compared with $8.1 billion in the same period the prior year, according PricewaterhouseCoopers.

This is driving an interesting structural shift - my observation at TED was that too many of the NFP Startup CEO's looked like the same blazer-wearing MBA weasels of the last cycle, and cared little about the "ethical" bit that Not For Profits used to be all about. The WSJ seems to concur:

“Silicon Valley used to be libertarian, but we are all Keynesians now,” said Venky Ganesan, a managing director at venture fund Globespan Capital. “Everybody is trying to stick their snouts in the flow of pork.”

Yup - whereas the old game was VC cash for as-much-as-you-can eat free services, the new menu is all about currying pork....

Some startups and venture firms have hired lobbyists to monitor the action in Washington and get a leg up. “We wonder whether it will come down to currying favor with four senators or six congressmen,” said Matt Niehaus, a general partner at Battery Ventures.

While one would expect much of this, the issue a year or two down the line will be how to:

- Wean these companies off the pork belly teats
- Sort out the ruined reputation of the whole (under-regulated) NFP sector from the depradations of the greedy little sh*ts climbing in now
- Sort out the confusion in markets where state subsidies give unfair competitive advantages

If it were me, I'd be thinking of some form of fixed payback regime for state money and commercial style oversight of Not For Profits that are not truly "ethical" businesses and are in areas where commercial companies once roamed, or else it willl be a headache in 2 years time.