Why does this Guardian article about the Government putting aside £1 Billion to fund technology startups give me a gloomy feeling?

Somehow one knows that if the government does this, the bureaucracy will kill or at least stifle too many of the innovative companies that go with it. When we started in 2005/6 we wasted too much time (not a great deal thank heavens) talking to and negotiating with VCs and getting a small firms loan guarantee. That was a particularly dispiriting experience because we found out in the end that although our bank pretended to be part of the scheme, it really was not. It turned us down because it had done hardly any such guarantees in the previous two years but remained officially ‘part of’ the scheme because the government expected the scheme to have the support of the main banks. We managed our start up funding by keeping our commitments very low and at least we do not have to worry about VCs and second or third rounds of lending/funding.

Here is a really good blog by Paul Graham (who is behind the very early stage and light-weight investor Y combinator) on why innovators in information technology now dont need VCs. Here is his argument:

……many Internet startups don’t need VC-scale investments anymore. For many startups, VC funding has, in the language of VCs, gone from a must-have to a nice-to-have.

This change happened while no one was looking, and its effects have been largely masked so far. It was during the trough after the Internet Bubble that it became trivially cheap to start a startup, but few realized it because startups were so out of fashion. ……VCs and founders are like two components that used to be bolted together. Around 2000 the bolt was removed. Because the components have so far been subjected to the same forces, they still seem to be joined together, but really one is just resting on the other. A sharp impact would make them fly apart. And the present recession could be that impact.

If the UK Government wants to give a real impetus to IT innovation it should emulate Barak Obama’s commitment to 100% broadband availability so that all American kids have access to state-of-the-art broadband. The UK Government could make that happen next year. In schools, colleges, libraries and the streets next year that would make a real difference to thousands of innovators, inventors and startups, a much bigger difference than scores of subsidised VC-style startups, that would only get going in 2010 (if you haven’t negotiated with them you have no idea how slow VC’s can be, even when they are moving).