Every founder, funder, and entrepreneurial support organization in the Midwest says the exact same thing: There just isn’t enough early-stage capital. Even a city with a relatively well-developed (by non-Silicon Valley standards) venture capital scene, like St. Louis, still faces a severe shortage of seed and pre-seed funding.
That problem led several organizations to create the $5 million Spirit of St. Louis fund, which focuses on the lack of early-stage funding in the St. Louis metro area.
The Spirit of St. Louis fund is great, but $5 million in one city does not solve the systemic lack of early-stage capital plaguing every startup scene in Middle America. However, the role the St. Louis Regional Chamber played in helping to create Spirit of St. Louis fund speaks to an important fact: The lack of early-stage money isn’t a problem that is going to be solved simply by the natural migration of capital to opportunities that are likely to get the highest return. If this problem is going to be solved, it will take leadership from outside of the venture capital world.
In other words, creating good jobs and strengthening local economies aren’t the jobs of venture capital firms. Yes, VC firms here in the Midwest seem to be very community-minded, and job creation is hopefully a byproduct of a successful investment — but the purpose of venture capital is to return the highest possible profit to the fund’s investors, not reinvent local economies.
That’s why addressing the lack of early-stage funding in startup ecosystems outside of the coasts may require the federal government to get involved.
It isn’t as crazy as it sounds.
Politicians from both parties have told us for the past several decades that entrepreneurs and small business owners are the engines of economic growth, and that we are all better off if those individuals are given the opportunity and the resources to create jobs.
For 40 years, one of the primary ways the federal government has tried to do that is through tax cuts.
That approach usually doesn’t work.
Research (and the words of actual CEOs) shows tax cuts for large corporations and wealthy individuals usually aren’t reinvested back into job-creating activities. Instead, large corporations often use the money for share buybacks. In the rare instances when those tax savings are (indirectly) invested in startups, the money flows into funds where it will get the highest return — which means the money isn’t likely to end up in early-stage funds focusing on Midwestern startups.
If you believe the reason for having a startup scene in St. Louis, Kansas City, Des Moines, or Omaha is to recreate Silicon Valley on a smaller scale, then the public sector shouldn’t play a role in solving the lack of early-stage funding. The government definitively should not be in the business of helping just a few people experience the windfall that comes with a billion-dollar exit.
But if you believe that the reason for having a startup scene in those cities is to help create good jobs, strengthen economies, and revitalize communities, then the government may have a role to play in helping early-stage startups access capital. In fact, it may have to play that role.
Of course, no one wants Washington, D.C., deciding which startups are worthy of an investment.
That’s why funding should come in the form of block grants distributed to state and local organizations like the Missouri Technology Corporation.
You could also label a concept like this “corporate welfare.” And maybe it is — but at least it’s corporate welfare with intent. It isn’t cutting taxes on large corporations because in theory they will reinvest in the local economy. Instead, it’s investing money directly in the idea that entrepreneurs are our best job creators.
In most instances, the private sector is the best entity to solve a difficult problem. On occasion, it isn’t. And when the private sector is best suited to solve the problem, it tends to solve it quickly, because being the first to solve the problem means being the first to profit from the solution.
The fact that every founder, funder, and support organization identifies a lack of early-stage funding as a problem yet to be solved tells me that we should at least explore the idea of a public sector solution.