Start-ups in a funding crisis? So here's a proposal

A public-private partnership worked for the semiconductor industry. With a little creativity, it could work for tech start-ups as well.

With the elections behind us, Wall Street's bears returned to form by dumping stocks in a big way on Wednesday and Thursday. Out in San Francisco, another tech conference devoted to all things Web 2.0-ish got under way amid dread about the future. And Cisco's John Chambers cast a further pall when he warnedthat a sales slowdown has spread from the U.S. to Europe, Asia, and the emerging markets.

On the surface, none of this is encouraging news for the near-term prospects of start-ups, which are the lifeblood of the tech business. So it was that last month Ron Conway of Sequoia Capital counseled start-ups to hunker down and cut their burn rates until this squall lifts.


Given current events, that's sensible advice. But risk-taking is the sine qua non for innovation in the technology industry and this sort of thing suggests a lousy environment for innovation. In her recent book, start-up veteran Judy Estrin offers a parallel worry: the impact of reduced research spending on U.S. innovation. (The Organization for Economic Cooperation and Development ranked the United States 22nd in the percentage of GDP that nations spend on non-defense research.)

So you've got private sources of capital drying up just as the U.S. enters its deepest financial crisis since the Great Depression. I don't pretend to have a crystal ball into how long any of this will last. But with a new administration taking power in January, now's the time to get creative about figuring out possible answers.

In the mid-1980s, the U.S. semiconductor business was in such a parlous state there were concerns the industry would not survive the competition with Japan. So it was that a public-private partnership formed. Some 14 U.S. chip companies and the U.S. government created a consortium called Sematech (SEmiconductor MAnufacturing TECHnology), in 1987.

The idea was to jointly leverage resources and share risks in a bid to resolve common manufacturing problems. Seven years later, U.S. firms were again enjoying market share leads and by 1996 there was no longer any need for government matching funds.

And this was during the Reagan administration, hardly a proponent of free-spending, federal involvement in the private sector. But the leadership of the day acted in its enlightened self-interest and made an exception with Sematech. Obviously, the current conditions are not completely analogous.

•  The size of the budget deficit is huge and sure to grow.

•  With the auto industry on the verge of collapse, there's pressure to come up with another multibillion dollar bailout.

•  And if there was agreement on some kind of tech start-up super-fund, how would you draw up the rules governing who receives funding and how much?

•  What should the revenue split be?

•  How long before a company would need to stand on its own? Etc.

OK, it would be complicated but let's not get lost in the weeds. The details are less important than the need to find a way to keep the funding spigot open. Maybe the private sector can't do it by itself and maybe Uncle Sam's not ready to go solo either. But don't tell me that the best and the brightest from both sectors can't figure out a way to figure out how to meet midway.

Time to get out ahead of this crisis before the stuff really hits the fan. Don't you think?