This write-up is born of a conversation I had over coffee with a friend. Still, all blame for unpopular thoughts and opinions here -- now and always -- is my own.
By design technology innovation is messy innovation. It's marked by long hours with little pay, trial and error (upon error after error) and disruptive effects to the market to which it's introduced.
It's a messy, uncertain process, but it's a free process. In theory.
In a truly capitalistic society there's no monopoly on opportunity; Any schmo of any origin with the right mix of desire, tenacity, and luck, can strike it rich if he fills the right opportunity gap. There's no right or wrong way to do it. At least any more than there's a right or a wrong way to code a program or prepare for the CFA Exam or play guitar...
But technology entrepreneurship is its own animal. Because it's sexy and because it's a money machine, cities have discovered ways to institutionalize the process of new product innovation. Profitably.
[To be clear, I'm not talking about private incubators like Y Combinator. Because they're privately held they're bound by economics determined in a fair market. I love YC.]
How the story goes (through the lens of my community)
To get seed money it's generally expected that you first work with a tech incubator funded with state money. That they're funded by the state is both relevant and critical in the scheme of things; it means they're able to assume a place in the private equity spectrum that other players in the capital markets (especially VCs but angels, too) are too risk-averse to occupy.
The incubator gets money to promote its interests. Angels and VCs get free due diligence. And lucky entrepreneurs get cheap money (albeit on taxpayers' dime). Everyone wins, right?
Wrong (government meddling in free markets always yields some negative outcome). The negative outcome here is a de facto monopoly on the technology innovation process held by the publicly-funded incubators.
It's a surprising outcome which is precisely why it's dangerous. Few see it, fewer understand it.
Its effect
The most efficient way for a risk-averse investing public to perform due diligence on investing opportunities is to let others do it for them. No one's more willing to do that than the incubators who can finance it with other people's money (remember, they're state-funded). So it becomes a sort of right-of-passage for technology startups that they should pass through these incubators before they see an opportunity for venture capital, and more and more, for angel money. And you can't blame the investors... it's an economically-sound decision on their parts.
This funnel approach places loads of power (and money) is in the hands of a few players. Those players are an old boys' club* of sorts that has its own philosophies, risk aversions, and investing predispositions. Some include:
- excessive favoritism of alumni from local big-name universities
- favoritism for those in (and on the perimeter of) the old boys' club
- exclusionary policies for everyone else
Fine. We understand the situation, but what can you as a tech founder do about it?
What you can do about it
It's my belief this problem is worst in small tech centers where it's easiest for a single, state-funded player to sieze monopoly power of the technology process. If that typifies your community consider these options:
A pragmatic decision: The most obvious solution is the solution which maximizes variables among one's opportunity set; that is, to play by the establishment's rules of the game. It's safer, easier, and more straight-forward than the alternative. Alternatively, there's...
A principled decision: If you accept the argument here (most won't) you'll find yourself in a precarious catch 22. On the one hand you can acquiesce to your community's institutionalized system of tech entrepreneurship. Working capital will be easier to come by, and you'll rest easy at night knowing you can pay the bills in the morning. On the other hand you can bootstrap your company, or move it to a community whose investing philosophies are more consistent with those which prevail in a fair market.
I'm not in a position to say what's right for you. It's only my goal to highlight the stifling role government plays in the innovation process, and to inform your decisions as you fund your technology startup.
*A word about the guys who end up in these old boys' clubs: They're smart, and in most cases hard working. It's not my goal to discredit them... even they may not understand the economics of their work.
For a more technical conversation of government's role in the establishment and preservation of monopolies see Chapter 8 of Milton Friedman's Capitalism and Freedom.
