Why We Should Be Worried That Washington Is the New Job Creator

Is Washington the new Wall Street?

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At his jobs summit on Thursday, President Obama said, "…while I believe that government has a critical role in creating the conditions for economic growth, ultimately true economic recovery is only going to come from the private sector.”

[See 5 Surprises in the Latest Jobs Report.]

But when Obama says "the private sector," he seems to really mean "the private sector with significant prodding from the federal government." And indeed, his administration has already done much to change the relationship between government and the entrepreneurial sector. I use entrepreneurs as a stand-in for private-sector economic growth because empirically, small start-up companies are the most important drivers for job growth. A study from the Kauffman Foundation found that in 2007, companies less than five years old created two thirds of the new jobs.

[See 5 CEOs Who Are Worth Their Fat Paychecks.]

But while entrepreneurs have usually placed their business development first and foremost, there is some evidence that the increasing role of the federal government has forced many to emphasize lobbying, politicking, and jumping through administrative hurdles.

What got me thinking about this subject was a conference last October here in D.C., the AlwaysOn "Entrepreneurs' March on Washington" conference on October 20. One panelist, Jonathan Wolfson, CEO of South San Francisco biofuel firm Solazyme, was somewhat surprised he found himself in Washington, D.C. "In the 50, 60s, and 70s, entrepreneurs did not come to Washington," he said.

There was a clear reason why AlwaysOn, an online media company that promotes Silicon Valley businesses, held an event in D.C. in the first place: For entrepreneurs, this is where the money is. The difference in culture has been stark between the world of politics and the world of entrepreneurship. "Silicon Valley is a meritocracy. Best business strategy wins," said Wolfson, whose company Solazyme recently won a contract with the Department of Defense to develop clean biofuel produced from algae for the U.S. Navy, as well as a Department of Energy grant to build a biorefinery.

But, as shown by a conference where venture capitalists, CEOs of new tech firms, and other entrepreneurs attended panel discussions with names like "Tapping The Trillions," today it's not just bankers and big auto company executives who are trying to navigate the often unmeritocratic world of Washington politics. "Washington, D.C. has become the new Wall Street when banks aren't lending," said Wes Bolsen, a speaker at the conference and CMO of Coskata, Inc, an Illinois cellulosic ethanol company.

But while the money might have brought entrepreneurs to Washington, it was unclear how long they will stay. Many attendees expressed skepticism that any one entrepreneur with a great idea could attract the federal government's attention—and wallet—without significant political connections.

Federal money for innovative companies has dramatically grown in the last year. President Obama has explicitly called for government funding to be used as a tool to promote the next great companies. He campaigned on promises to invest $150 billion in new energy technologies. In August the National Economic Council announced a "National Innovation Strategy" in which "the government should make sure individuals and businesses have the tools and support to take risks and innovate."

Portions of the president's stimulus plan put some of the administration's innovation goals into effect: For example, the stimulus gave $400 million to the Advanced Research Projects Agency-Energy (known as ARPA-E) a previously unfunded Department of Energy program. President Obama, in a speech announcing ARPA-E this April, described its mission as to "find [the] wellspring of creativity just waiting to be tapped by... entrepreneurs across our country." In its first round of funding announced October 26, the program gave $151 million in awards to 37 high-tech companies and research institutions, out of thousands of applicants.

ARPA-E is just one of numerous technology grant programs rolled out under the Obama administration. The National Innovation Strategy promises to double the budgets of grant-giving science agencies like the National Science Foundation and the Department of Energy's Office of Science.

In an interview last year, Obama said "finding the new driver of our economy is going to be critical." But despite all this investment in high-tech companies, venture capitalists who work in the field are skeptical that the money will find the new drivers. "Is [the stimulus money] a good use of tax dollars? Maybe," said John Backus, managing partner at New Atlantic Ventures. "But will it spur innovation? No." One concern is that the brand-new innovative companies will get left out. "The government doesn't know how to work with 20-person companies," said Backus. "Most cleantech money in stimulus won't go to the startups. It goes to the defense contract giants."

Those who have won contracts with the government—like Wolfson's Solazyme—are much more comfortable with the growing collaboration between Washington and the nation's entrepreneurs. "Government has always had a major role in the energy industry," Wolfson told me. In the case of his firm, government might be necessary. Getting production of his company's algae-based biofuels off the ground will require significant investment—over $100 million for one plant—that the capital markets simply cannot supply right now, he says. But he doesn't want to be a beneficiary of favoritism—Wolfson says that after government investment gets the ball rolling, the market should take care of the rest. "Policy should be driven by ends and be technology-agnostic," he said.

For entrepreneurs like Wolfson, the potential payoff is big enough that it is worth spending time and money away from Silicon Valley to take the risk that the Obama administration won't pick their technologies. Can the government think like venture capitalists and let the best technology win? "I'm optimistic, but ask me again in two years and we'll see," he said.

Later this week, I'll share some more details from other people I interviewed at the conference.