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Obama’s Economic Policy

Posted on Friday, Jun 6th 2008

Yesterday’s discussion on Obama’s Economic Policy somehow got side-tracked to a discussion on venture capital compensation, which is not what I had intended.

What I had intended, rather, was a discussion on how to inject more entrepreneurship into the system, and how to get corresponding financing to build a large number of sustainable small businesses in the $5-$50 Million bracket that create jobs, and create wealth.

I happen to be of the opinion that some sort of screening and adult supervision greatly enhances the success rates of new ventures. Thus, venture-funded companies tend to have somewhat higher success rates than those that are not venture-funded. Thus, I am proposing an increase in the venture capital pool, but doing so with a twist.

Before we go on, here are some more statistics from the SBA:

* Estimates for businesses with employees indicate there were 649,700 new firms and 564,900 closures in 2006.
* Over the past decade, small businesses created 60 to 80 percent of the net new jobs.
* Firms with fewer than 500 employees had a net gain of 1.86 million new jobs. Large firms with 500 or more employees lost more jobs than they created, for a net loss of 181,122 jobs. (2004 data)

One of my thoughts from yesterday’s discussion is that an extremely viable group that can play a role in the business creation part of the eco-system is the corporations.

Think about eBay and Amazon, and their “seller” eco-systems. They could very well also fund “sellers” or “power sellers,” and help them create / scale their businesses against a proven, relatively well-understood business model.

Similarly, Google could fund “online publishers” who use their AdSense for Content and help build a large network of small publishers. This would cause them to also take another look at their AdSense business model, for example, and make it a fairer structure. Again, it is a relatively well-understood business model.

SunPower can fund entrepreneurs building solar power plants.

There are lots of opportunities for creating strategic “franchises” and use policy / taxes to stimulate the economy through such entrepreneurial efforts. The advantage of attaching strategic franchises to corporations is that a lot of domain knowledge and business expertise that exists within the corporations can easily be transmitted to the small businesses, alongside financing.

If corporations are given tax incentives to create investment vehicles to engage in large scale entrepreneurship of this nature, an attractive win-win virtuous cycle can be created.

Now, the goal of these investment vehicles is not necessarily to swing for the fences and look for home run 10x returns. The goal is to (a) serve as a tax shelter (b) have strategic snowball effect on the company’s eco-system (c) foster entrepreneurship in the small business sector.

Let’s take a quick look at the numbers:

If Fortune 500 can allocate $100 Million per year on average into, say, 100 such ventures each (or 50 or 200, it doesn’t matter), we are talking about 50,000 new ventures a year. And if the ventures are properly mentored and monitored by the corporation executives, are relatively simple business-model wise, and don’t take wild technology risks, there could be a much lower rate of failure than today’s average in free-flowing new venture creation.

So, Barack Obama’s summar activities should include discussions with (a) Corporations (b) Entrepreneurs to get into the details of how to tie those two constituencies together with intelligent policymaking.

Obama’s campaign knows how to utilize the Internet really well. He should be able to test these ideas with his constituencies easily, using his vast reach into our desktops.

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It’ll be interesting to see how protectionist vs competitive advantage creating Obama’s economic policies will be. I’ve made a pretty thorough review of his book (http://mathoda.com/archives/174) and the potential use of technology by his administration (http://mathoda.com/archives/189), but I’ve also pointed out where at least one of his perspectives don’t make much sense (http://mathoda.com/archives/184).

Ranjit Mathoda Friday, June 6, 2008 at 11:50 AM PT

How many existing corporations with vested interests in status quo business models and infrastructures be godparents to really innovative, game changing ventures? There are the 3Ms and Googles of this world, but am not sure how many Fortune 500 corporate development efforts are up to the task. Am not sure of the stats of how many ventures are home-grown by corporations vs. acquired through independent creation and development outside the walls.

Another way to think about it is what kinds of pressures on corporations would force them to be more innovative? One way is creating top-down public policy driven goals to force change (fuel efficiency standards, etc). Another is investors being more demanding on valuing the longer-term prospects of an enterprise (ie – when does milking a profitable truck/SUV franchise tip towards creating a game changing electric vehicle, or your previous comments on the long-term viability of the Indian outsourcing model).

Holden Lee Friday, June 6, 2008 at 1:40 PM PT

I don’t think we’re talking about game-changing, really innovative ventures, here, Holden. We’re talking about low-risk, but stable, sustainable ventures. I gave a number of examples above.

The real high-risk / high-return game-changing entrepreneurship will still remain the sweet spot of the top bracket of the venture capital industry.

I think you are missing the point that not all ventures need to be game changing.

Sramana Mitra Friday, June 6, 2008 at 2:43 PM PT

Obama is a socialist radical. I do not see how he can make America better. He will take America down the drains. Taxing the rich, universal health care, no moralistic values with changing the definition of marriage. I do not get it. India and China will forge ahead under Mr Obama’s reign and America will be doomed. Sramana, do you support Obama and how do you think America will be under him. I think having him power is great for countries like India who can be positive America is doomed. I sincerely hope he does not come to power in USA for her own sake.

american_hope Saturday, June 7, 2008 at 6:19 AM PT

I like both Obama and McCain, and feel that neither so far has exhibited any understanding whatsoever about economic policy. I don’t agree with socialist policies at all, at the same time, I have seen nothing compelling from McCain yet.

I am interested in Roney’s take on Economic Policy.

But frankly, all I am trying to do here is to understand and brainstorm about what ought to be the economic policy.

On Security issues, btw, I think Obama is vastly wrong. McCain knows more.

Social issues – I don’t believe in marriage by paper. I believe marriage is a mental state. I think Gays should be allowed to marry if they want to, and have very close gay friends whom I love dearly.

I suspect, American Hope, you and I have very little in common the way you write above. Obama seems like a decent young man with dignity, an internal compass, and the commitment to doing the right thing. He seems inexperienced, but if an non-intellectual like Bush can run America, Obama can too, and I bet, he will do a better job.

As for McCain, I think he is a courageous man, also with an internal compass.

I respect people with a solid internal compass. So, the fact that America has chosen two men with that can only bode well for the future.

As you can tell, I am an independent thinker, and interested only in seeing the right policies shape up, and the only reason I have opened this topic in this forum is to facilitate that brainstorming.

Sramana Mitra Saturday, June 7, 2008 at 8:32 AM PT

The Economist’s front cover this week sums it up nicely for me: America at its Best. We have two presidential candidates who appear to have internal moral compasses, can speak intelligently and seem committed to change. Also, neither believes that humans were riding around on dinosaurs 3,000 years ago or, I hope, that the separation of Church and State was a bad idea. I suspect that, if either becomes our president, I won’t have to cringe with embarrassment when discussing him with my overseas friends, as I do now.

I can’t wait for the town hall debates, and sincerely hope that they’ll happen.

The topic of stimulating the creation and growth of $5-50M revenue companies is complex and fascinating. The vast majority of small businesses come nowhere near those revenue levels, and are really 1-5 person service companies. Those just need to have taxes and healthcare kept under control and, for the most part, be left alone!

I see many “lifestyle” businesses in my job. That sounds pejorative, but it’s not meant to me. Many VCs use that term to describe self-funded, organically-grown companies that generate $5-20M in revenues, throw off 10-25% EBITBA and stay there for ever. That’s terrific, and I wish that there were more of them in the US. They’re not venture fundable, for the most part, and they shouldn’t raise venture capital. They sometimes try to do so in order to generate rapid growth, and the results are generally poor for all concerned.

The majority of the $5-20M companies that I meet are led by strong-willed, independent entrepreneurs, which isn’t surprising. Their largest frustration is the lack of “organic growth capital” (defined as capital that lets them, say, double their revenues, and employment, over a period of 3-5 years). That capital would generate on the order of 15% IRR, well below a VC threshold. Further, the entrepreneurs running such companies are often loathe (for their own good reasons) to part with much equity or control.

A government policy that provided tax breaks to providers of such “organic growth capital” could simulate the creation of funds to provide it.

The actual CREATION, versus growth, of a $5-50M company is a much tougher proposition. I agree with you, Sramana, that “adult supervision” and filtering do indeed generate better results, and not just because that’s my current job. So maybe the question is how you create a VC-like industry that’s targeted towards lower and smaller returns? That’s a very tough question, because lower return must equate with lower risk, and I don’t know how you de-risk the creation of smaller, lower-growth, businesses.

Alex Osadzinski Saturday, June 7, 2008 at 9:35 AM PT

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p>p>It does, doesn’t it? I just spent the morning in bed reading that issue of the Economist. “Here’s the article in question.

Yes, the creation of more $5-$50 Million businesses challenge is a tough question, but don’t you think that’s the question we should try to find an answer to in the context of the current discussion?

One way to de-risk the creation and building of small businesses is to use frameworks, business and technology models that have been vetted by “adults” and potentially are part of the eco-system of a major company that has vested interest in seeing that particular “genre” of companies succeed. [Example: Online Retail is a proven model, eBay/Amazon/Google – all have vested interest in making it succeed. Funding various types of online retailers, for example, mitigates risk.]

Another very interesting opportunity is to fund businesses that align with major government agenda issues: Healthcare, Education, Energy. Entrepreneurs can build small solar energy sources or wind energy sources (I won’t call them “plants”) with moderate investment, and sell the energy back to Utilities. The Utilities need renewable power, the government wants more renewable energy and can invest in these entrepreneurs, and stimulate a virtuous cycle.

Healthcare – how about clinics? nursing homes? mental health facilities? Those are all small businesses that we need a lot more of if universal healthcare has to become a reality, and the government will most likely fund a lot of it.

Education – how about personalized skill-gap diagnostic + tutoring services funded by No Child Left Behind? how about private schools with teachers who are paid well, enough to attract really good teachers, where entrepreneurs setting up these schools get incentives from the government?

Sramana Mitra Saturday, June 7, 2008 at 11:35 AM PT
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