Excerpt from Columbia Business School Ideas At Work Blog

Innovative, upstart ventures have a crucial role to play in economic recovery, says Michael A. M. Keehner, who suggests it may be time to give entrepreneurs a stimulus package of their own.

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Lately, the notion of getting a bailout has become embedded in American culture, intensified no doubt by unprecedented federal support for troubled companies like AIG. So far, the rationale has been that some firms are too big to let fail. I think there are some firms that are too small to let fail too — young enterprises that are the entrepreneurial backbone of our economy.
As Americans, we hold our tradition of entrepreneurship dear. Decades of economic growth have been fueled by innovators spawning new industries, high-value jobs and stock market gains. Lotus, Southwest Airlines and Google are but a few of the success stories. Yet one result of our credit and subprime crises is that the current wave of U.S. innovations is very likely to be slowed — or in some cases lost to us entirely — from lack of adequate investment sources. Many of these young entrepreneurial enterprises are facing serious cash shortages or even outright failure, not for lack of entrepreneurial promise, but for lack of dependable funding. And if they lose their momentum, we as consumers, investors and perhaps even employees will lose the benefits innovation usually bestows.

No stimulus plan under consideration addresses this critical sector’s vitality directly — not a surprise, since the companies are too small to lobby effectively. And, their venture capital (VC) sponsors have seen a degradation of their political clout over most of the last decade, overshadowed as they have been by the sponsors of investment vehicles that use leverage and financial engineering. I suggest that, rather than betting everything on outdated industries or new infrastructure, we place a few stimulus chips on the best of our young and soon to be cash-starved enterprises.

These budding enterprises are typically underwritten by VC funds which invest in young, high-potential companies and hope to see a return as the companies mature. Venture capital funds are in turn funded by institutional investors and high-net-worth individuals and managed by dedicated professionals.

The majority of new entrepreneurial companies do not use substantial leverage. Nevertheless, the damage from the subprime and credit crises is very meaningful to them. The lack of a viable IPO market is their first impediment. Public markets are a crucial capital source for these enterprises when they reach maturity as well as an exit where the venture capitalists can realize and recycle their investment gains. The IPO market has been nonexistent since last August save for one deal, Grand Canyon Education. The Nasdaq index was down as much as 33 percent last quarter and was extraordinarily volatile. An outright sale is an alternative for some young companies, but many that do not want a sale or cannot find one are being forced to seek unanticipated rounds of venture funding because there is no viable public-market access and none is likely soon.

Read the full article

Professor Keehner is a seasoned executive and prominent investment banker with global experience, senior management responsibilities and a successful track record. He spent over twenty years of his career with Kidder, Peabody & Co., Incorporated, a full service global investment banking firm where he was a member of the firm’s Board of Directors and Executive and Management committees. He left Kidder, Peabody in 1994 and formed a strategic advisory and private investment company. He also participates in turnaround situations and venture and other principal investment activities. see the full profile

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Tags: , AIG, entrepreneurial enterprises, importance of entrepreneurship, Michael A. M. Keehner, Venture capital