Comment by bugsy | Hacker News Reader

Comment by bugsy | Hacker News Reader

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The federal government is now using taxpayer funds to buy equity in promising startup firms, on the same great terms as other early angel investors.

Isn't state ownership of the means of production called Socialism? Well don't answer really, it's a rhetorical question, the government buying ownership of new firms is socialist by definition, and this is not a "Obamer is socerlist derp derp derp" silliness, but a real concern.

This will distort and warp the investment field. Companies that qualify for federal treatment not only get VC funds instantly doubled, but they then qualify for a whole host of competitive advantages such as the listed "patent fast tracking" not available to those who don't drink from the fountain. In other words, those not participating are penalized.

VCs are individuals often with business acumen and understanding of entrepreneurship who do due diligence and keep tabs on their investments. The largest bureaucracy on earth and in history can not make the same decisions, it is not possible. But it does have infinite funds because it owns currency printing presses, and doesn't lose anything if the businesses fail, so there is no risk to them.

To understand one of the many problems here, take the word "government" out of this and replace it with "Bob Smith". Bob Smith is an investor funded with a printing press that he prints counterfeit dollars with to invest in companies. Without any concern for business plans or profits, if any VC in the world invests in a company, Bob agrees to double their investment on the same terms of ownership. Also, Bob has arranged with politicians to create many special benefits available only to firms he is invested in, such as expedited patents that aren't looked at as carefully for those in his special Bob Smith fund. Companies they are competing with don't get the same special legal privileges unless they agree to sign the contract with Bob and give him partial ownership. If the business fails, Bob prints more money. If it succeeds, he takes a slice of a real business for himself. Does this seem like a good idea?

This is not a good situation nor can it end well.

The other key aspects are:

1. Bob Smith can legally point a gun at another VC to take large quantities of their money.

2. The process of getting an investment from Bob Smith puts the relative trivialities of "office politics" or "networking" in perspective. The US Government is to Office Space as Office Space is to a startup.

Forgive me for playing devils advocate, but how is this different from the existing responsibilities of the SBA and the SBIC? It looks more like an expansion of the existing small-business incentive programs than some sort of nefarious scheme.

In this case, a private individual (e.g., Bob Smith) would be more likely to take advantage of the possible malicious asymmetries you point out than Uncle Sam.

Not that i say that from any sort of idealism about the government: Rather, i don't think the level of organization & complicity required for these panicky worst-case scenarios is present, not across the range of civil-servants who would all have to be "in on it"

I.e., yes, a private person could go in with a take-no-prisoners approach, but the government itself is neither so ambitious nor so concentrated. I think you're getting frothed up -- can you point to widespread, existing corruption in the SBA or SBIC?

Funny and emotional 1 hour lecture about how startups are already a form of socialism and a magic cure for our economic ills http://www.reddit.com/r/Documentaries/comments/f35gs/capital...

Not sure how widespread this view is among economists and government officials. When campaigning at Google's HQ, Obama said something like tech is the only sector of our economy that's growing, he'd like to replicate that success. Some people focus on the organization style of startups, but it might have more to do with the fundamental properties of "information technology," where it's easy to make and distribute incremental improvements.

Another aspect of that is that taking that money (which comes from taxes as you mentioned or from inflation) reduces the bottom line of businesses across the USA. The taxes directly hit the bottom line, but the taxes and the inflation boost the cost of goods, making consumers buy less, and production more expensive.

The thing is, job creation comes from business expansion. So, taking the money in the first place hurts the economy.

This sort of investment scheme is not the worst use of $2B from the US government, I'm sure they spend that much on wasted paperclips each year. But even with this relatively wise investment, it will never return to the economy enough growth to replace the damage that taking it out did in the first place.

I think this is an important economic point that people miss because they don't really think about where government money comes from, and the impact it has.

Further, they are investing this money in "disadvantaged areas" and "areas like clean energy", which is to say politically connected or politically influential areas. Political correctness is not a good investment strategy and will produce lower returns.

Anyway, a company looking at expansion will look at the capital and resource requirements for that expansion. If the marginal cost of a new employee is around $10,000 (a rough estimate on my part) then that $2B will directly prevent the creation (and in the case of marginal businesses that are forced to lay people off, cause the destruction of...) around 200,000 jobs.

200,000 jobs may not sound like that much, but the next year the economy will miss out on the economic effects of having 200,000 more people employed for a year, producing more goods and profit for their employers and buying more goods themselves. That activity creates jobs which are also lost.

It is a compounding effect, and that is just assuming the program only lasts one year and costs only $2B. (I think for the federal government to distribute $2B in investment money, the programs will cost $4B or $6B when all is said and done.)

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