Venture Capitalist Is Not A Proper State Role

February 19, 2013 13:00 pm

by Charlie · 39 comments

Today’s Courier Herald Column:

If you want to play word association with a Republican, say “Solyndra”.  Most likely, you will hear the response “crony capitalism”.  If you allow the conversation to expand, you’ll likely hear that in a free market economy the government shouldn’t pick winners and losers.

And then you can bring that conversation home to Georgia.  Except you can change the word “Solyndra” to “Invest Georgia Fund” and the answer you will hear will be “economic development” or as it is commonly abbreviated around here, “Jobs!”.  It is amazing how quickly the perspective changes when the party proposing to direct taxpayer dollars into the capitalistic pursuit of unproven technology also changes.

Last week a bill to establish a seed-capital fund to provide venture capital for emerging Georgia technology companies was proposed in the Georgia House of Representatives.  HB 285 proposes to set up an independent board to direct funds to companies in technological areas for “the establishment and growth of innovative enterprises that create new, value added products, processes and services and encourage growth and diversification in the economy of the state.”

Worthy goals indeed.  And the bill’s sponsors are well intentioned people, seeking to replicate in Georgia what has been done in other states.  And yet, the question must be first asked (as it should be before any new government program is created or initiative undertaken) is this something government should be doing?

The fact of the matter is that venture capital is an industry that already exists and is available to Georgia companies.  The thought that the state will create a government owned entity to replicate what already exists in the private sector is but one of the first causes of concern.

The Invest Georgia Fund is to be managed by an unpaid, “independent” board appointed by the Governor, Lieutenant Governor, and Speaker of the House.  For those who believe that these boards can be truly independent, try another word association.  Ask any sponsor of this bill to change “independent board” to “independent redistricting commission” and then ask their definition of independence.  They will likely tell you there is no such thing.

If that doesn’t work, then ask the governor’s Deputy Chief of Staff about the role of Governor’s appointees on independent boards.  If he needs help answering, refer him back to those that lost their appointments when they disagreed with this Governor.  These are called “teachable moments”, so it is important we learn what “independent” really means from them.

There was a time when pro-business conservatives sought to create level playing fields with broad low tax rates and minimal government interference from regulation so that market forces could choose winners and losers.  That time appears to have been when they were the minority party in this state.

Last year’s tax reform package was little more than a laundry list of picked winners that included electricity producers, manufacturers, big box retailers, and car dealers.  Winners in this state’s business environment seem to be directly correlated to the amount of fees paid to the right lobbyists.

Given the environment of patronage and legislation for hire in this state, it is difficult to imagine any current system that would be truly independent or free from political influence.

There also remains the deficit of trust in government and the elected officials over ethical dealings at the capitol.  Adding an insiders’ fund of capital before ethics problems are fixed at the capitol seems less than prudent.

The state has many roles in which it can properly address economic development.  Improving education and maintaining acceptable infrastructure should be chief among those roles.  Creating a board of political appointees to replicate activities currently available from the private sector should be significantly lower on that list – if at all.

saltycracker February 19, 2013 at 1:36 pm

Charlie – right on – in listening to our Cherokee Co. State legislative members last night – Beach, Laudermilk, Caldwell, Hill, Ballinger & Turner the overall takeaway was positive.

There were a few exceptions and one glaring one is the topic you discuss. While taking positive steps to implement legislation that opens the door to economic development some did not see the folly in making the leap to directing massive tax incentives to specific corporations.

The biggest one mentioned was Beach proud of his role in getting the UPS building on Mansell Rd. in Roswell included in a high unemployment zone then getting GM a tax break of $3,000 x 1,000 employees for several years. $3,000,000 per year. I seriously doubt the unemployment crisis in Roswell is high tech. When would the money come from for just the road improvements come from to accomodate this ?

The response, when talking to another later was, if we don’t do it some other state will………

Initating or eliminate broad legislation to attract high tech probably would not allow a lobbyist to write a company specific attachment and donations would shift to some other legislator.

saltycracker February 19, 2013 at 1:38 pm

modify: where would the money come from……

saltycracker February 19, 2013 at 1:42 pm

apologies – the topic is venture capital & last night’s remarks on tax incentives for companies triggered my semi-thread jack.

Noway February 19, 2013 at 2:28 pm

Salty, did Loudermilk say again that his was the only person who’s soul was pure enough to issue a slavery apology on behalf of the legislature? Just curious if he ventured there once more.

saltycracker February 19, 2013 at 4:31 pm

:) No – wouldn’t be looking for that to this Cherokee crowd – while the speakers did get a little specific they pretty much (it was an initial meeting for several) stuck to love for the consititution, smaller gov’t, lower taxes…..when they got specific, challenges came….

I did sit up smiling, when Loudermilk (answering a guy hot over the auto tax) talked about eliminating property taxes as being unfair to tax just for owning something.

Responding to an inquiry from Beach on health care about CYA lab testing due to litigation fear, a Dr. said it had more to do with fast hospital release and then the Dr. was challenged by a lab owner saying the cost was driven up by doctors marking the tests up, illegal in many states, ok in GA.

Turner mentioned his support of term limits – applause. He & other newbies get over that about their second term.

Ballenger mentioned her bill on court fees but when she got to her support of hot lanes, she was boo’d…she handled the rudeness well……

A couple people tried to get individual yes/no on proposed bills and were answered that bills morph and the final version may be completely different…….

John Konop February 19, 2013 at 9:01 pm

Salty,

Brandon is very focused on job growth, and I appreciate the effort. What I respect must about Brandon is his ability to bring different groups together. I think he will de a very good job representing us. I am tired of the pitting groups against each other approach……..

saltycracker February 19, 2013 at 9:50 pm

Some jobs we can’t afford – a $3000 annual tax break for an employee that probably want looking for a job ?

saltycracker February 19, 2013 at 9:52 pm

Wasn’t looking for a job…….iPhone did its thing….

John Konop February 20, 2013 at 6:08 am

Salty,

If UPS put on 1000 more employees the theory is that they now have money to spend via the job. And if you target high end jobs obviously it generates more tax revanue via sales tax, gas tax, income tax………Also more people working creates more jobs via more services needed ie restuarants, retail……….Btw does not include jobs created by improvements and or construction done a commercial buildings when new employers come to a community. At the right avearge income per job we would come out a head on 3k per job. This does not include social service cost savings for having lowered the unemployment rate.

saltycracker February 20, 2013 at 7:15 am

Unemployment percentages will go down as they import 1,000 skilled workers diluting the numbers. One thing that will move up will be the taxes and congestion for local citizens to subsidize the corporation. Success with this level of per employee breaks is fiscal fuzzy math.

saltycracker February 20, 2013 at 7:43 am

P.S. it was G.M. that got the $3 k per. And opportunity zones are the new rage with our tax dollars. When a meal becomes a feeding frenzy…….

Jas February 19, 2013 at 1:50 pm

Just curious, how were electricity producers “winners” under HB 386?

Raleigh February 20, 2013 at 6:22 am

Electricity producers didn’t get much in HB386. The big winner was the Auto Dealers Association and new car dealers. Georgia Power’s ship came in when SB 31 was passed in 2009.

Charlie February 20, 2013 at 7:30 am

If you remove the tax on something that is produced, it benefits the producer. See any entry level econ text and look up the concept of tax incidence.

Jas February 20, 2013 at 8:34 am

So adding an administrative burden in which the electricity provider receives no compensation somehow benefits the electricity provider? Normally, I would agree with your pithy reply however in respect to a electricity provider who has no competition, as GA Power, EMCs and electrics cities have in Georgia, the fundamental concept would not hold as much, if any weight.

Three Jack February 19, 2013 at 1:53 pm

Thanks for shining the light on this hypocrisy Charlie.

Your first point of opposition is the only one needed; government should not go into competition with existing private industries, especially when it comes to capital investment in startup companies. The VC and other private investment firms in this state are madeup of highly qualified, very successful people who know how to evaluate ideas before risking their money. An appointed government board with no financial skin in the game will not scrutinize submittals with the same level of industry expertise as a Cordova Ventures or Noro-Moseley Partners. Another bad idea from GA GOPers.

BTW, we are probably about halfway through the 2013 session, any bills to address gridlock, serious tax or education reform…didn’t think so.

saltycracker February 19, 2013 at 6:16 pm

Let’s repeat to help the points:
Lots of smart VC money out there -
Public workers not only lack the skills of assessing this ventures but should not be allowed to take the necessary risks with public monies.
Public efforts should be in positive legislation/regulation (not monies) in the risky private ventures.

seenbetrdayz February 19, 2013 at 2:41 pm

But . . .

“Jobs”!

See, I just won the argument.

“Jobs” is the magic word to win any argument for spending taxpayer funds!

So, “Jobs.”

/comments. There’s nothing else to say.

xdog February 19, 2013 at 4:30 pm

In principle I support the idea of government investment, ‘promote the general welfare’ and all that, but even without knowing the details I’m sure I’d oppose a state investment program run by Deal and his cronies as being too sleazy and inefficient to benefit anyone but the inner circle.

If Deal really wants to make a mark on Georgia, if he wants to spend state money in a way truly beneficial to the people of the state, he’ll look at getting public education funded appropriately and sufficiently to satisfy the needs of education and the legal requirements. Of course, then he’d have to take on the current crowd leading the march in favor of charter schools, vouchers, secret scholarship funds, squeezing poorer school systems, et al.

elfiii February 19, 2013 at 4:38 pm

When did this notion government is better at picking winners and losers than the free market take hold?

There is a reason politicians are not “Captains of Industry”. They aren’t smart enough for the job.

AlpharettaMan February 19, 2013 at 9:31 pm

Charlie,

Appreciate your thought into this, but this article is only half true and does not fully explain how the InvestGeorgia program would work. While yes, there would be a board of advisors appointed by state government leadership, that advisory board is simply that – they are only tasked with overseeing the program and reporting the General Assembly. The bill outlines how they advisory board does not pick the investment funds that receive allocations, nor do they select individual investments that are made. The advisory board’s main role is to, through an open bid process, select a third party fiduciary that actually manages the fund. It is the role of the third party fiduciary to select early and growth stage funds to make allocations to. Those early and growth stage funds then invest into the actual companies. At no point do any elected officials have control over what company receives investments and individuals with ties to funds that want to receive allocations are prohibited from serving on the advisory board.

It should be noted that the state will receive 100% of its investment principle back and 80% of the profits once an individual fund comes to term. Addtionally all investments must go to Georgia companies and only Georgia funds may receive allocations.

In a perfect, true free market economy the state wouldn’t need to do this, or offer tax credits for that matter. The truth is we don’t live in that world and other states are taking Georgia companies away because they have similar programs and the access to capital is readily avaliable.

I guess the question I pose is, would you rather have tax dollars being spent on economic development by state bureaucrats or in the hands of investment professionals who do this for a living?

As you can see I have been following this bill. With a technology start up in the works and the challenges in finding capital, programs like this will help. I welcome any feedback and after reading this site for years, I’m sure there will be.

Charlie February 20, 2013 at 7:29 am

I reject the question that you pose, as should every conservative who is tired of being offered false choices so yet another government entity can be created so those that think they are good intentioned can use taxpayer dollars to create new fiefdoms and manipulate the market.

And I note that you ask would I rather…but don’t offer the alternative of….

Regardless, I ask the question back. Would you give President Obama or the leaders of the state Democratic party this same pot of money to do with as they please? Because majorities and their proiorties come and go. But government created slush funds are forever.

saltycracker February 20, 2013 at 7:48 am

Here, here……

Chris Huttman February 20, 2013 at 12:34 pm

Romney’s Solyndra high horse upset me more than a lot of his other stuff, because Mass. had the exact same type of funds going when Romney was governor, he just happened to get out of that business (governing) thanks to an assist from the voters (they wouldn’t have re-hired him) before the market went bust.

I agree with you, in general, that the state shouldn’t be doing this type of stuff. What about when every other state is doing it though – is there more harm in saying no than saying yes?

When it comes to Medicaid expansion, the fact that so many other states are doing it means Georgia should (and eventually will) too. But, on investing money, even if other states are doing it, you could make a credible case that you still can’t beat the market, even with the distortions of the other states.

Your thoughts?

John Konop February 20, 2013 at 7:49 am

This is a catch 22 issue in my opinion. From a pure economic, possible political corruption and free market position Charlie is right, but in reality many states are doing this red and blue to gain business ie jobs…..

The real question if we do not do it how will it effect our economy? If we fall behind other state doing this would it not cost us even more to jump in? I am not sure if it is the right formula and has the proper controls in place. If implemented correctly, especially with Georgia Tech and Emory medical…….I could see how this could be a big help. The right controls need to be in place, and the right people that understand start – up business issues on this board.

Finally if designed right I would use this over tax breaks…..If a business puts up capital and receives Debt and or equity you know they will hire people ie jobs……A tax break does not guarantee net new jobs many times……..

saltycracker February 20, 2013 at 8:06 am

InvestGeorgia is a taxpayer slush fund for private industry with a govt profit sharing carrot. A conservative should be working to prohibit such activity.

Three Jack February 20, 2013 at 10:52 am

John,

Georgia has an public-private incubator already, ATDC — http://atdc.org/ — it has been around for over 30 years and helped launch many successful high-tech companies. ATDC puts up $1 for every $3 raised through private sources and has many of Georgia’s top VC firms as sponsors. These GOP politicians trying to create a new government backed VC are creating a problem where one currently does not exist. They should instead focus on what will really help create jobs in this state; transportation, education and tax reform.

John Konop February 20, 2013 at 10:49 pm

Good point

ryanhawk February 20, 2013 at 10:07 am

“With a technology start up in the works and the challenges in finding capital, programs like this will help.”

Sure they will help you and other startups…. Taxpayers, not so much. If you can’t convince a private lender to fund your enterprise you shouldn’t be funded.

“the state will receive 100% of its investment principle back and 80% of the profits once an individual fund comes to term”

And 100% of the losses. Not a good deal for taxpayers.

David Staples February 20, 2013 at 10:31 am

“With a technology start up in the works and the challenges in finding capital, programs like this will help.”

Have you tried ATDC? http://atdc.org/about/about

There’s also Startup Lounge (Google it) run by Scott Burkett and Michael Blake, and a variety of other resources already in Atlanta. There are angel investors and venture capitalists in Atlanta. Just ask Sig Mosley (Imlay Investments) or any number of other people in the scene. Spend some time networking in that crowd. There are plenty of other people and resources that I could point you in the direction of, but that should get you started. :-)

David Staples February 19, 2013 at 9:55 pm

I don’t see why anyone would be concerned. After all, he made that rather wise investment in a high end outdoors store that’s now booming, right? Perhaps they’re seeking a second round of funding to expand operations? ;-)

Matt Stout February 20, 2013 at 7:51 am

+1

elfiii February 20, 2013 at 10:02 am

@Charlie “Because majorities and their proiorties come and go. But government created slush funds are forever.”

Thread killer! :)

Lea Thrace February 20, 2013 at 10:43 am

:-D I prefer the following:

BOOM!

Sums it right up.

Left Turn Only February 20, 2013 at 12:04 pm

That bill is, of course, unconstitutional in several ways, for one for being a gratuity prohibited by the state constitution. They know, they don’t care.

seekingtounderstand February 20, 2013 at 1:06 pm

If everyone of us who pay taxes in GA would explain to everyone on our contact list exactly what they are doing…………………………..no one would be re-elected.
Most folks do not know how legal graft works and do not have time to do the research or pay attention.

seenbetrdayz February 20, 2013 at 4:24 pm

If government is going to operate like a stock market, we the taxpayers should get returns when tax day comes.

But that never happens.

When government “invests”, this is what happens:

Taxpayers get hit up for some dough to ‘loan’ to a company, that company turns around and pays government back, and taxpayers don’t see any returns from it. Not even so much as a tax refund. Oh yeah, and then government comes back and says we need to make another loan to another company and the cycle repeats.

It would be like running a bank, where instead of depositors investing the money to let you make loans, you just send out a bunch of thugs to beat up retirees and take their money to make loans. You pocket the profits, and the retirees are told it’s for their own good.

It’s not like government is learning to fund itself through these ventures. If that were the case, we wouldn’t need taxes. But the government is not a bank, it is a black hole. There’s no profit motive, because, heck, if you lose money, you just go beat some cash out of the taxpayers.

David Staples February 20, 2013 at 10:34 pm

“You pocket the profits, and the retirees are told it’s for their own good.”

Either that, or it’s for the children.

elfiii February 20, 2013 at 4:43 pm

@seenbtrdayz – “It’s not like government is learning to fund itself through these ventures. If that were the case, we wouldn’t need taxes. But the government is not a bank, it is a black hole. There’s no profit motive, because, heck, if you lose money, you just go beat some cash out of the taxpayers.”

Preach it brother!

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