There is a controversy brewing in the world of government grant money to start-ups that is trickling into the VC community.  The Small Business Association (SBA) of the US government administers Small Business Innovation  Research (SBIR) and Small Business Technology Transfer (STTR) provides grants to small businesses (defined as fewer than 500 employees) to the tune of $2 billion per year.  This compares to $20-30 billion per year in VC money that flows to start-ups, so a meaningful figure in the entrepreneurial economy.

But the two worlds of VC-backed start-ups and SBIR grants have mixed like oil and water historically due to a key restriction in grant eligibility:  start-ups that are 51% or more owned by VCs do not qualify for SBIR or SBTR grants.  Thus, a young start-up in a field relevant to the government grant world has a conundrum when it considers taking VC money – it no longer will be eligible to receive non-dilutive government grants.

Many VCs argue this is a ridiculous exclusion that is fostering an adverse selection problem.  The economy is awash in VC money and so only the less promising start-ups aren’t getting it.  Instead, they get taxpayer-funded government money.  The most promising start-ups who can get VC money are not eligible for government money.  Hence, the government is serving as a funder of last resort to companies who the invisible hand of the market has rejected.
 
That may sound like an overly harsh view, but it is one that the NVCA (National Venture Capital Association) is arguing as they try to get the Senate and House to agree to loosen the restriction. Mark Hessen of the NVCA points out that “Venture capitalists have funded well over 90% of all the biotech firms in the United States”.  It is an interesting debate and the House and Senate are in the midst of it. 

I confess to being sympathetic to both views.  My father was an entrepreneur in the 1960s and 1970s who received government grant money to foster his innovations in the defense electronics community.  At the time, though, the VC community was miniscule compared to today.  In 1980, the VC industry comprised of under 100 firms with a mere $4 billion under management.  Today, there are 700 firms with over $250 billion under management.  It’s hard to argue that just because a firm is successful in attracting VC money, it is unworthy of government support.  The fact that SBIR applications have been dropping sharply in recent years (down 12%, 15% and 21% in FY’05, FY’06, FY’07) is a clear signal that something in the system needs to change.

Anyone following the open source phenomenon can’t help but be amazed at what appears to be volunteerism on a massive scale for corporate gain.  Almost every company in the world has some strands of open source code floating around their company.  Whether it is the Linux operating system, Apache web server, the IP protocol or database programs such as MySQL, open source software has permeated corporations around the globe.  According to one estimate from start-up Ohloh, there are 11,000 open source software projects going on right now in the world and 70,000 devleopers contributing to those projects for free.

Further, the impact and reach of open source extends far beyond businesses alone.  Mainstream consumers are participants in the open source phenomenon.  Wikipedia is the most obvious example, which attracts 683 million visitors annually to its over 2 million articles (source:  Wikipedia, of course) – all written by volunteers throughout the world.

Clearly there is an explanation that goes to the heart of human behavior and motivation as to why so many people are inspired to contribute so much for free.  Any reader of philosophers from David Hume to Adam Smith to Ayn Rand would point out that there must be some underlying selfish motivation involved.  Open source participants aren’t getting paid, yet they must be motivated in some part out of self-interest.  So what exactly is going on?

MySQL CEO Marten Mickos seems to have the answer.  In a recent WSJ interview, he observes, “Those who contribute to us are as selfish as anybody else…[They are motivated by] their desire to build a reputation for themselves…it gives them a feeling of usefulness in the world.” 

And I think therein lies the key insight.  Isn’t that what everyone wants?  To feel useful and recognized.  I would suggest that explanation is also at the heart of why entrepreneurship is such a powerful phenomenon.  The reward for the entrepreneur is not just about the money – although, sure, they are motivated by the money — but what really drives great entrepreneurs is the ego, pride and feeling of recognition and respect.  When an entrepreneur sells their company or goes public, it’s that feeling of being a winner and having everyone notice that is most powerful.  Ask any entrepreneur if they’d rather own 1% of a $1 billion company that changed the world and makes the front cover of Business Week or 100% of a $10 million company that no one ever hears about and you’ll learn a lot about that entrepreneur. 

The NBA Finals “There Can Be Only One” advertisements with split screen images of Kobe Bryant and Kevin Garnett and other multi-jillionare stars said it all:  “We all want respect and there is only one way to earn the kind of respect we all want.  The kind of respect they can’t take away from you.  Win.”