The U.S. Government as a Leading Venture Capitalist

Etienne Deffarges is a serial entrepreneur, active angel investor, and author of Untangling the USA. As a senior partner with Booz Allen Hamilton and global managing partner with Accenture, he advised businesses and governments all over the world and orchestrated billion-dollar deals.

The U.S. Government as a leading venture capitalist, wow, is this a joke? This sounds like industrial policy, public intervention, and “picking winners.” It is something that European and East Asian governments do, but not us, right? Think again. The U.S. government has actually played a major role in developing many innovations used by our technology giants to reach worldwide dominance.

Exhibit one of this successful government role is the Defense Advanced Research Projects Agency, or DARPA. DARPA is over 50 years old and has invested tens of billions of dollars in a vast array of technology programs, notably in research allowing the creation of solar panels, the Internet and the GPS. DARPA continues to work today on advanced positioning and navigation technologies. It is also involved in stealth technology; advanced drones; deep-space satellites; artificial intelligence; machine learning; robotics; advanced biotechnology; and even neuroscience. It is a safe bet that it is also at the forefront of cybersecurity, although one can understand that this is not widely advertised. For a long time, DARPA was the only institution with both the required budgets and patience to fund fundamental research neither the private sector (risk aversion) nor universities (not enough resources) could successfully bring to maturity.

From a start-up’s standpoint, DARPA is the most friendly investor entrepreneurs can dream of.

ETIENNE DEFFARGES

From a start-up’s standpoint, DARPA is the most friendly investor entrepreneurs can dream of. It provides grants, sometimes in the tens of millions of dollars for a single company. These grants are “not dilutive” to the entrepreneurs and their early backers, friends, family and “angel” investors. This means that, unlike venture capitalists, Uncle Sam is not interested in gaining an ever-increasing share of equity in the early stage companies it supports. Rather, DARPA focuses on our national security. It views the companies it gives grants to as strategic to our future security and therefore takes a very long-term view. Many times it steps-in to help young companies’ R & D efforts where a more risk-averse business sector will not go—at least until a young company has shown tangible promise through early stage revenues. Deep pockets, patience, a very long-term strategic horizon, and no interest in taking control of one’s company—DARPA is an entrepreneur’s dreams come true. This, as long as the entrepreneur can demonstrate her or his project is worthy of grant backing, which obviously is a very selective process. But I have seen personally a dozen early-stage companies in areas as diverse as energy storage, improved fuel economy, biotechnology, satellite software, solar technology, and biofuels, receive DARPA grants.

DARPA’s current annual budget is $3.4 billion, larger than most venture capital firms’ annual investments. To keep this in perspective, from 2002 until 2017, total annual venture capital investments in the U.S. were in the $15-25 billion range. And the story of the U.S. government’s involvement in young companies does not stop at DARPA, which has a Department of Energy cousin in the shape of the Advanced Research Projects Agency-Energy, or ARPA-E. ARPA-E is much younger, having been formed in 2009. It is also smaller, its original funding being $400 million, as part of President Obama’s February 2009 Economic Stimulus Bill that helped our country rebound after the disastrous 2008 financial meltdown.

ARPA-E’s focus is on the pursuit of affordable, reliable and environmentally friendly energy. Just like DARPA, this DOE agency takes a very long-term and strategic view of the entrepreneurial companies it provides grants to. ARPA-E has supported start-ups in environmentally friendly technologies: advanced carbon capture; batteries for energy storage; bio-fuels; biomass and geothermal energy; solar and wind power. Today, an area where ARPA-E is making a big difference, and one where no venture capitalist has ventured thus far, is in the development of a much-needed “smart grid.” This effort brings together innovations in electricity transmission, local distribution, and energy storage to enable renewable power to overcome its physical limitations, e.g. peak electricity demand taking place at 8 pm, after sunset.

DARPA and ARPA-E have helped countless start-ups gain traction, reach “proof-of-concept,” go to market and eventually become successful companies. These strategic and far-reaching U.S. government agencies have no equivalent in the rest of the world. Who says the government cannot be an entrepreneur’s best friend?

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