Lerner's "Boulevard of Broken Dreams" examines how governments have attempted to support entrepreneurs. Some initiatives have succeeded, others wasted billions. The topic is especially timely, given our stalled economy and two years of mostly unsuccessful government efforts to revitalize it, along with the rise of sovereign wealth funds ($3.5 trillion in 2008) and President Obama's goal of doubling U.S. exports in five years. Successful government-led efforts include Dubai's new port at Jebel Ali, and hubs of entrepreneurial activity in China, Tel Aviv, and Singapore; unsuccessful examples include Dubai's overbuilding that has created a sea of red ink, and U.S. efforts to encourage bank lending - despite entrepreneurs being faced with overcapacity in manufacturing, retail and office real estate, millions of homes in the process of being foreclosed, and large corporations holding nearly $2 trillion in cash. Moreover, the value of recent government bailout efforts for poorly-managed and failing G.M. and Chrysler remain unclear. G.M. is now succeeding, but so is Ford - without government help; meanwhile the future of Chrysler is still in doubt.
Lerner's focus is on one-in-a-thousand high-potential (hi-pot) ventures, not subsistence enterprises - eg. more 'Mom and Pop' stores. Roughly 600,000 new businesses employing others are started each year in the U.S., yet only about 1,000 receive their first VC funding in any year. Venture capitalists (VCs) have played a major role in the initial funding of American hi-pot ventures, and provide a comparison base for evaluating government efforts to stimulate new ventures. Lerner tells us that about 0.5-1% of business plans presented to VCs are funded; sometimes they're syndicated as a means of getting a 2nd opinion. Only one-third of those initially funded make to the initial public offering (IPO) stage, the most attractive exit option for VCs. (Since 1999, over 60% of IPOs were previously VC backed.)
VCs have little involvement with the mature manufacturing sector - instead they are involved mostly in software, biotechnology, and semiconductors. Whenever VCs invest, it's generally via preferred stock with restrictive covenants - eg. blocking additional financing, and requiring a certain number of VC representatives on the board. VC funds are typically disbursed in stages, conditional on achieving certain technical or market milestones. VCs also provide intensive oversight and advice, and introduce the firm to potential partners and managers.
Over the past three decades VC investments in R&D and capital have been less than the corresponding budgets of large firms. However, by late 2008, VC-backed firms that had gone public employed 6% of the total public-sector workforce, mostly high-salaried, skilled technical positions, and per Lerner, were 3-4X as patent productive per dollar than corporate R&D during the 1983-92 period. The 'bad news' is that VC returns have become mediocre, and their number is declining - too much capital chasing too few opportunities.
Most economists, including Lerner, contend that government subsidies are appropriate to encourage positive externalities (factors the market doesn't reward - eg. reduced smog, global warming, dependence on foreign oil). Unfortunately, Lerner sees government as having a poor record at picking winners. Some of this is because some groups become more skilled at filling out government paperwork than innovation, other instances because of non-market preferences (eg. race, gender,business size). (The same can be said for university VC funds and research parks.) The 'good news' is that Lerner sees Israel as an exception, thanks to its its practice of adding money to existing private funding and encouraging involvement of outside VCs from Europe and the U.S., bringing a broader perspective.
Lerner concludes that efforts to support entrepreneurs are likely to be more successful if built upon a foundation of private funding (especially an 'angel investor'), linked to local academic/research center talent in the San Francisco, Boston, or the New York areas, encouraged by low long-term capital gains tax rates, are not limited to local activity (eg. may include Asian programming contributions), and tied to previously successful entrepreneurs. Less successful government investments are associated with trend chasing and active involvement of political leaders.
Unfortunately, the timing of "Boulevard of Broken Dreams" does not allow its incorporating important recent developments. The first of these is the U.S.'s failure to set demanding green energy goals, despite the inevitability of peak oil, global warming, increased pollution, and our vulnerability to external energy shutoffs. Even our improved, though relatively weak fuel mileage goals are being politically challenged. Meanwhile, China has set demanding goals, and used them to spur rapid green energy manufacturing development within their boundaries.
Second, increasing numbers of American firms are moving R&D to China - partly because China requires this to participate in their huge markets, partly because R&D is cheaper there, and partly because R&D is more effective when more closely linked geographically to manufacturing (in China). Meanwhile, returns to U.S. R&D investments are falling because it has become increasingly likely that any resulting manufacturing would occur offshore.
Third, the ability of China's government to pick winners and support rapid innovation, especially in green energy, has made U.S. R&D more risky. Solyndra, a California solar power manufacturer opened a new $733 million robot-run factory backed with a U.S. $535 million loan guarantee in September, only to find Chinese manufacturers had driven prices down 40% during the plant's construction. "I don't see another Solyndra being done," says Anup Jacob, head of the VC firm that invested heavily in Solyndra. Solyndra originally planned for production capacity of 610 megawatts by 2013 - instead it now is closing its original plant, laying off about 200, saving $60 million in capital investments, and will only have capacity of 285-300 megawatts by 2013 (New York Times, 11/9/2010). Clearly we need to add accelerated implementation times (eg. use existing buildings and equipment, pay royalties instead of developing and patenting new methods, simplify product attributes and product lines) to Lerner's recipe for success. (Miasole, a California firm, now claims its new thin-film process produces power for less than $1/watt, vs. $3 for Solyndra, and competitive with peak-power gas instalations. Economist, 12/10/2010)
Bottom-Line: The U.S. now ranks behind every industrial nation except France in the percentage of overall economic activity devoted to manufacturing - 13.9%, down 4 percentage points in a decade, thanks to off-shoring (New York Times, 7/20/2009). The coming rise of India, and China's nascent pursuit of R&D, computer programming, etc. help validate former Federal Reserve Vice-Chairman Alan Binder's forecast of 40 million U.S. service jobs being vulnerable to outsourcing in the coming two decades, as well as continuation of existing job losses in manufacturing. BRIC (Brzail, Russia, India, China) nations realize they each have a target painted over them - most of the world's market growth lies within their borders. Their relentless focus on exports is intended to both boost their own employment, competencies, and cash, and as a defense to ensure their ability to defend against potential imports from U.S., other OECD nations, and their fellow BRICs. Meanwhile, the U.S. will find it increasingly difficult to export into BRIC markets as their own internal capacities expand, Since financial markets highly value growth, BRIC financial markets will also rapidly rise, U.S. markets will simultaneously fall, and American enterprises will become acquisition targets. Therefore, the U.S. government needs to go beyond the lessons offered by Professor Lerner in "Boulevard of Broken Dreams" on picking winners and funding them, create a sense of urgency, and also learn from China's government. Failure to do so places our manufacturing, service, and financial sectors all at risk of collapse within the next decade.