I had an interesting discussion with one of my colleagues the other day. It started over Twitter and then continued in the office. I had posted a link to a Fred Wilson blog post that suggested that VCs may currently be chasing there tales in the same way that bankers did with Mortgage Backed Securities a couple years ago. The central point that Wilson made was that in both cases, people were investing in things they didn’t understand. My colleague pointed out that unlike mortgage backed securities, especially ones of the synthetic variety (which were essentially bets placed on air), over-investment in innovative companies has positive externalities. This isn’t a new argument for me, I have argued on this blog before that the most effective “stimulus” investment that the governments can make is in funding startups (using models like InnovationWorks and AlphaLab). This funding leads to jobs and also helps keep Pittsburgh and the US ahead in innovation, making it far better then over-paving a road or giving senseless tax cuts, right?
What was interesting was being forced to consider both the positive externalities associated with the over-funding of startups alongside the fact that this public funding is contributing to the pending bubble in startups (much like the bubble that formed in Mortgage Backed Securities). Is it still a good thing for government backed entities like AlphaLab and InnovationWorks to dump money in to startups that couldn’t raise funding from private angels and VCs, if that money could cause the bubble to burst. What about “stupid” investments from people who don’t understand the technology space, could they actually be harmful? What if a bursting bubble means that in the long-run private investors and VC funds exit the market, considering it too risky?
I don’t have a good answer to these questions, but the thought of it is challenging my opinions on stimulus spending.