Archive for September, 2008

Pulling back the curtain on the economy

How did the U.S. economy get into this mess? Well, I think one man is largely responsible. I call him Oz.

Nearly ten years ago the dotcom bubble occurred. This was an aberration. Large numbers of investors, many of which could be called speculators, were able to affect the economy by investing in new Internet companies. Tremendous amounts of money were poured into technology businesses. The surge drove the stock market up and employment down. Salaries soared in the technology sector. There was a shortage of talent. People who knew nothing about the Internet or software were switching careers. All was good in the land of technology.

Then reality hit and the bubble burst. New technology companies closed their doors – usually quickly. Unemployment increased. Stock markets tumbled. The bubble was so big, the U.S. and global economies felt the effects.

To make up for this financial tailspin, Oz stepped in. He stood in front of his economy machine, with its dozens and dozens of switches, buttons, and levers. He thought he knew how all those controls operated and inter-related. There he was making adjustments moving the various switches. Oz was going to fix things. Later on Oz admitted “he didn’t get it”.

That is when the damage was done. Oz lowered interest rates drastically and kept them there. He knowingly created a housing boom to curtail the dotcom fallout. This was a way to avoid the financial downturn from the technology sector. He panicked, made unnatural adjustments, and let them run their course. He had no real understanding of the side effects of his actions.

In actuality, Oz knowingly substituted a housing bubble for a technology bubble, to avoid a downturn. As the technology sector contracted, the financial sector boomed. This time the boom was fueled by Oz’s polices at the Federal Reserve. The low interest rates lured more speculators. Mortgage companies were popping up every where. They were offering loans backed by investors (speculators) – not banks. Banks, which traditionally backed loans, now offered loans backed by investment banks, who thought they could make money via new lending products based on low interest rates. Housing prices skyrocketed. With these new loans everyone one could own a home. All was well the American dream.

It turns out the cure was worse than the disease. Oz created a housing boom that was an even bigger aberration. The new financial products were unrealistic. Reality hit again. Foreclosures increased. The housing market ground to a halt. Markets plummeted. Oz brought some of the largest investment banks in the country to their knees, with several going out of business.

What was Alan Greenspan thinking? I am not sure, but I believe one conclusion can be drawn. The economy is complicated – too complicated to try to control. No one man can understand it, nor control it. To think so is foolhardy and to try makes one a fool. Here is a case where one foolish man created an economic disaster almost single handedly.

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September 19, 2008 at 7:26 am Leave a comment

Keep SBIR funding opportunties pure

There is a push to revamp the SBIR/STTR system. One aspect of the change is to allow for private investors, angels and venture capitalists, to have more leverage. Bad idea.

SBIR (as the name implies) was intended for small businesses. Large businesses, such Raytheon and Boeing, already have relationships with the government. SBIR was intended to provide a venue for small entities to interact with the government and share in opportunities.

Today (2007-2008), venture capitalists, and even angels, no longer represent small businesses. Funding has moved upstream – toward bigger opportunities, leaving a void for businesses. To give VCs any significant say in how SBIR/STTR money is distributed would be shutting down one of the few potential sources of funding (< $1M) to innovative companies.

SBIR/STTR represents a choice.

SBIRs can be an alternative to private investment. Why eliminate a viable alternative for funding. Why shut down an alternative to angels and VCs.

SBIR can represent a way for small companies to bootstrap. A small company can retain more value/equity while bootstrapping and developing initial technology. SBIR is free money, in terms of equity.

SBIR offers opportunities based on different criteria than VCs. Who is to say VC-think is the only way. There are plenty of worthy projects that would not receive funding (especially with the move upstream), from VCs.

The current system works fine. It does not preclude the involvement of VCs – even when VCs own more than 50%. Keep in mind:

SBIR money is to be used primarily for development (R&D).

SBIR is a three phase protocol. Phase 1 is feasibility and planning, phase 2 is build out of working prototype, and phase 3 is commercialization.

SBIR phase 2 funding generally has a maximum of $1M.

This is perfect, particularly in today’s funding market. Angels and VCs are primarily interested in less risky propositions that have very large, Google-like potential (lol). They want to see working products before investing. SBIR provides an opportunity for small companies to build working prototypes at a funding level angels and VCs have abandoned. And, there is nothing to prevent private investor involvement after phase 2.

In fact, having any angel/VC participation in SBIR/STTR programs is just bad. It will have the affect of diminishing the chances for legitimate small businesses to receive funding. VCs are have fairly sophisticated machinery in place in starting up companies. Once SBIR/STTR programs become available to them, they will simply incorporate those programs into that process, giving them an unfair advantage over the true intended recipients of the grants.

I was surprised to learn that an Angel/VC group is behind the push to elbow their way in to the SBIR/STTR program. You can see that this group is fairly opinionated. They believe they define what “promising” means when evaluating new companies and ideas. This is exactly why an alternative, like the SBIR/STTR is needed.

Personally, I would like to see angels and VCs start acting entrepreneurial. When I hear these types of investors talk, they conjure the vision of the high school student who is on the baseball team. As a baseball player, he is rather average, but has grandiose visions of being A-Rod. I have heard countless angels who have a couple hundred thousand to invest, but only in billion dollar opportunities. Pleeeeease, be real.

The SBIR/STTR program is not perfect. But allowing angels/VCs to be involved is a wrong direction. Some simple improvements would be: build awareness of the program, streamline the application process, faster turnaround on applications, and provide a division to fund more commercial opportunities (non-defense).

September 4, 2008 at 9:30 am Leave a comment


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