Is VC compatible with DC?

One of the interesting stories shaping up in the bailout of the Detroit 3 is the potential government support for silicon valley startups. Joe White wrote a good piece in the WSJ today, that covers many of the salient points.

What hasn't been covered yet is whether the government support (and the strings attached to it) will be compatible with the capital structures and business goals of the silicon valley ecosystem.

First lets get a common misconception out of the way: the original $25B loan program developed by the government is known as EISA (for Energy Independence and Secuity Act). The money was appropriated for the specific purpose of providing loan guarantees for the development of advanced vehicle technology to improve the efficiency of automobiles. A specific carveout was allocated for small companies (including suppliers and startup automobile manufacturers). Somewhere along the way various political interests suggested that this money should be diverted to address the short term cash flow problems of the big 3. It now looks like that is the way things are playing out.

So for anybody out there talking about a silicon valley company asking for a bailout, you missed the point. The real point is the money originally intended for fostering advanced technologies is being redirected by congress to support a general bailout.

That isn't to say that some type of bailout isn't called for, but somewhere along the line these two things got intertwined and the consequences extend beyond the public relations challenge of separating the "bailout" from support for advanced technology development.

The real interesting question is: what will happen when Washington gets around to considering the applications of technology startups for federal loan guarantees under EISA?

It is clear that there will be many strings attached for companies that take these funds (the current thinking can be found here.) Will the same strings be attached to funds dispensed under the original intent of EISA? The original terms of EISA were relatively lax, but the recent political pressure brought to bear on congress to show that the taxpayer's money is being invested wisely and protected against misuse may lead congress to attach similar terms to monies granted under the original intent of the law.

What then? Will the current backers of silicon valley startups be as willing to subject themselves to the onerous terms of the government loans as the Big 3, whose only alternative at this point (at least for GM and Chrysler) seems to be bankruptcy? The extensive control and oversight provisions would be hard to swallow for a privately held startup accustomed to controlling its own destiny.

Admittedly, it is a big leap to assume that the same strings attached to the "bailout" will be attached to funds distributed under the original intent of EISA. However, in the current political environment congress will have a tough time differentiating between the two. The vast majority of EISA was allocated for the big 3's use in the first place, and it is hard to believe that these funds (assuming EISA survives intact) will be directed to the Big 3 with terms any different from the bailout currently being considered.

If that's the case, I think we might see might see silicon valley saying "thanks, but no thanks" and going it alone.