Governments Acting as Venture Capitalists

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Governments Acting as Venture Capitalists

The Solyndra debacle is not the exception. The practice of government funds underwriting the costs of questionable ventures is a failure of basic common sense and meaningful oversight. The lack of wisdom in adopting a public policy that picks and chooses actual companies for government subsidies, should be self-evident. However, the crony relationships that finance elections, writes the legislation and is rewarded with fat government checks is so entrenched that hardly an eyebrow is raised with the exposure of each new scandal.

In an academic paper Governments as Venture Capitalists, the historic context is stated.

"Governments have traditionally taken indirect measures to encourage venture investment. These include the fashioning of fiscal and legal frameworks which can help markets channel resources to new and innovative enterprises. For example, governments can take steps to eliminate double taxation — of gains and dividends — in venture investment. They can tax capital gains at rates, which encourage more risk-taking, and they can reform rules and regulations in the capital and securities markets to increase the attractiveness of investments and improve the availability of exit mechanisms. Governments can also devise and enforce provisions to protect intellectual property and thus the patents and innovations of start-up firms."

In spite of these practices, a wall of separation existed that maintained a barrier between direct government financing and the capital markets, as the primary source of funds. How times have changed. The notion that government should act as investment bankers is one of the most dangerous erosions of capitalist foundations. An example cited by the National Center for Public Policy Research announced in a Press Release, is disturbing.

"Responding to public outrage following an ABC News report that a $529 million loan from the Energy Department was used to back electric car company Fisker Automotive -- which is creating jobs in Finland -- policy experts at the National Center for Public Policy Research are calling attention to the crony capitalism surrounding clean energy loans and grants.

"The Energy Department's loan to Fisker Automotive underscores the problem of the government acting as a venture capital company. In reality, the real green is not in the manufacturing of an electric car but in the green dollars that the politically-connected are seeking by leveraging taxpayer money. It's a financial lose-lose for taxpayers: if the project fails, taxpayers take a hit; if new autos are a success, billionaires such as John Doerr cash in and taxpayers don't financially benefit," said Tom Borelli, Ph.D., director of the National Center's Free Enterprise Project.

The Fisker Automotive loan provides a perfect example of the cronyism surrounding President Obama's clean energy push. The Department of Energy loan to Fisker announced in 2009 financially benefits Al Gore and his venture capital business partner John Doerr, who are partners in the venture capital company Kleiner Perkins Caufield & Byers. Kleiner Perkins Caufield & Byers has invested in at least two companies that have benefited from taxpayer support, and the firm and Doerr are also big donors to Democrats."

The United States has championed an economic system that rewards risk capital. The entire purpose of creating a business is to profit and grow the venture. By the nature of defining success for any organization, the long-term viability of continuous operations is a given. Yet in the age of sovereign wealth investment in international commerce, the latest import abnormality into America is the disease that governments must act as active investors in place of the capital markets.

The prospects for rabid corruption are undeniable, but the authorities usually dismiss such arguments and evidence based upon their own narrow self-interests. It would also be a mistake to believe that these abuses are isolated solely to the federal government. Russell Nichols in a Governing magazine article, State Governments: The Latest Venture Capitalists provides some examples.

"In New York state, for instance, Empire State Development joined forces with the University of Rochester Medical Center to help high-tech startups commercialize their ideas through a $2 million pilot seed fund project. In February, Maryland Gov. Martin O’Malley announced plans to spur job creation in cutting-edge industries by unlocking $100 million in venture capital through InvestMaryland. Various other states, from Oregon to Georgia to Connecticut, have been setting up similar programs to advance innovation in emerging fields. "We know these kinds of programs do work and make a difference," Berglund says. "In a down economy, now is the time when you really have to invest in the future. It’s even more critical at this point."

The instinctive conflict that lauded the bureaucratic culture and falsely claims state venture capital infusion actually "Works" ignores and denies the outrageous practice of the Fisker Automotive project. Anyone who thinks the formula on the state level is any less crooked certainly has little direct experience with the process.

Venture investment is the proper realm of entrepreneurs. Imagine a public sector angel investor distributing their graces of bountiful blessings from the public treasury. Such a vision of supernatural bliss only occurs in the deep illusions of a fairy tale economy.

Business must rise or fall on the merits of their products or ideas. Access to capital is crucial for any development. What does it say about the country, when government replaces the private sector as the source of lending or investing? Without the synergic risk of the investment, the discipline of prudent restraint is lost. Governments act if they are in business, but with the crucial advantage of not bearing the responsibility of bankruptcy.

Until the political class is prohibited from gambling on suspect concepts, the failure rate will be the only result produced. If wasting money were a business plan for government venture deals, the country would be wealthy.

Lost in the whirlwind of betting public funds on favored and risky ventures are the taxpayer. The real guarantee of loss is always bore by the very people who suffer the most by crony corrupt capitalism. Let us get real and dissolve government venture transfers and corporate welfare.

James Hall – March 7, 2012  

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