There is an alternative to super angels and micro-VCs, and it is being built as I write these lines: it is called Entrepreneur Commons - check out www.entreco.org

Seesmic bought ping.fm, so once they have integrated ping.fm into the desktop client, you can update your status.net from it. Until then you can still use ping.fm from other places (gtalk is one option I use)

The government should focus on helping the 99% entrepreneurs who are not helped by VCs.
And this means encouraging programs that enable "farming" rather than the hunting and gathering that VC pratice, focusing on helping entrepreneurs locally, providing opportunities for education just as much as for funding, because often times business issues are not just money issues.

And then when you need money, the government can make it easier to access. For example current SBA loans are done through banks, and bankers are not the best equipped to assess businesses, and certainly not at the startup stage. So on the funding side specifically:

- Micro-finance organizations have been able to help many small entrepreneurs in developing countries, and the model scales, so there is no reason that you could not help the 99% entrepreneurs left out by VCs through similar models in developed countries.

- Europe has successfully used mutual guarantee funds to provide easier access to money.

So one option would be to create a mutual guarantee fund, funded by the government initially (pilot phase), and a mutual guarantee as a way to make sure that the groups who are borrowing from this fund have an incentive to pay the money back.
Such fund, with a distribution mechanism has described on the Entrepreneur Commons website would make a huge difference. And the good news is that it does not have to be a huge spending from the get-go: start a fund like this, measure returns, and reproduce the model if it works. A few millions dollars would be a small drop in the government budget to get the whole process started, and if it is successful then regular investors will jump in because this is yet another opportunity to put your money to work.

The result: small investment (probably less than what is being spent today on a startup bill), huge potential impact. And it would send a clear message that things are changing.

As I write this post about Google, my Gmail is down. It has been up and down all day, and it seems that they are still experiencing issues. Unfortunate coincidence...

Government employees cannot be VCs, it would be a real waste of money on the government side and time on the entrepreneurs side.
And giving the money to be managed by existing VCs will not help either, because the issue with VC money is not the money, it is the process, which helps only a chosen few and leaves the majority with no help.
What I recommend in this area is what is laid out on the Entrepreneur Commons website: http://www.entreco.org - let entrepreneurs work together and decide among themselves who deserves money.
As an example, take a pool of 150 entrepreneurs interested in getting some money.
Provide them with mentorship, through an 8 to 12 weeks program, to allow them to go over their business with peer and mentors, for example in 20 small groups of 7 people. You can actually rotate the group mid-term if you want to improve the mix.
At the end of the program, everybody within a given group will have a very clear idea of who has a prime project and who needs to do a little more homework, so you can ask them to vote to help rank all entrepreneurs within the pool, to select who deserves money.
Now you have a selection process, and you can spread the money to the top 30/50/75 depending on how wide you want you to go.
And then you keep the mentoring going so that the ones who received the money share their experience with the ones who have not.

This will give you a version of the microfinance concept adapted to entrepreneurs in developped countries, and it would probably have way more impact than any of the other 2 options considered above.

Note that to make the whole thing really good, it would be better if the government money is just a matching fund, so that you get real investors in the mix, to help with the follow up.

Also note that if you want to resolve the return problem that you mentioned, it would be better to do the investments in the form of notes. That way you do not need to figure out valuations, and to force an exit at some point, you just get the money back with a decent profit.

If you have Angel investor friends, a convertible note is the best you can get. And it is a much cheaper transaction from a legal prospective than an equity deal. What is interesting is that while convertible notes are great for entrepreneurs (and for investors really at early stage) I see the Angel Capital Association pushing the other way, suggesting that Angel investors get into groups to get more leverage to negotiate equity deals.
Another tension we will need to resolve moving forward...

I agree that Venture Debt is a better option than VC equity deals, specially at early stage. One issue with Venture Debt however is that they will pick companies that are VC fundable, or they come in along with VCs to extend the VC investment with some debt. So while it is an option and it is a cheaper one, it remains that it will only benefit a lucky few, and then the 90% of other entrepreneurs who do not qualify have to find other ways. Something you should keep in mind before trying to fit your business plan into their requirements...

Very good point, thank you for bringing this up. There is value in going through the process once or twice as a way to do some of the homework that you need to do anyway, this is a great way to create deadlines that force you to go over some of the thought process that you may put off otherwise.
Having said this, these competitions are advertised by many as a way out of the seed financing issue that entrepreneurs face, and it is not. It will help a few, and it is better than nothing but it is not going to fix the system. Entrepreneurs need more and better than a few competitions...

Actually in the example given in the article, the startup refused to take the VC offer, and they ended up with a $300M company after IPO, so it is possible to do without VCs and they did.
Which was my point: while VC help in some cases, but it is an expensive option, and you should always remember that there are other options (debt or bootstrapping). I work with a lot of entrepreneurs in Silicon Valley, and many of them have been brainwashed into thinking that the only way to get the business going is to raise VC money, which is not the case.

I run into a lot of entrepreneurs who think that raising money is cheap, because they do not see the cost over the long term, just that they get cash for free in exchange for papers. So I want to make sure people look at the issue from the other end of the tunnel as well.
VC money is expensive, and people should be aware of it.