Stop Coddling the Super-Rich

As a follow-on, since many of you may not be familiar with how venture capital funds work......

Very interesting T.

Too bad the dems think that he super rich are those people making >$200K per year.

In short, the tech sector money cycle is entrepreneurs begging venture capitalists begging rich people for cash that the rich people hope the government and economy will let them keep this year.

++enlightenment;
++leftisthatred;

Some people think the government should be funding technology ventures instead of rich people because of fairness, social justice, or to fund "what rich people won't fund". Such individuals will have to acknowledge (or not) that even though every branch of the government has dabbled in venture capital at some point, all of them have produced horrifically poor results by any metric you care to use. A private venture capitalist would have lost his job if he performed that poorly.

Your comments are interesting and illuminating as usual, Tortoise. Thank you for them. On the whole, I think government ventures tend to be more exercises in passing stolen (confiscated through taxes) money around among cronies than exercises in efficiency or profit making, which means that their motivation is to drag out a given job as long as possible, in order to milk the maximum funding, rather than being efficient in an effort to maximize profits. The nature of the beast (it uses stolen money) causes it to get poor results.

Americans should take some pride in our venture capital industry. Many people do not know that it was created by a French immigrant (who became a US general in WW2) by the name of Georges Doriot shortly after the war. To this day the US venture finance industry is the envy of the world.

According to the (self-serving) statistics of the venture capital industry, 11% of jobs and 21% of GDP in the US comes from venture capital backed companies. If you look at how little of GDP is actually invested as venture capital every year -- less than 0.1% in 2010 -- it is the bargain of the century. We piss more money away on half the major agencies in the Federal government with far less value to show for it.

Keynesian puppets talk about multipliers of 1.1x or 1.2x that never materialize in the real world. The venture capital ecosystem realizes tangible multipliers that are vastly larger than the best wet dreams of the Keynesians. Yet the solution to our lack of economic growth is to steal money from the venture capital ecosystem and give it to the Keynesian bureaucrats. That has FAIL written all over it under the naive presumption that everyone is interested in jobs and economic growth.

... wet dreams of the Keynesians.

Ewwww ....

Some people think the government should be funding technology ventures instead of rich people because of fairness, social justice, or to fund "what rich people won't fund". Such individuals will have to acknowledge (or not) that even though every branch of the government has dabbled in venture capital at some point, all of them have produced horrifically poor results by any metric you care to use. A private venture capitalist would have lost his job if he performed that poorly.

Your comments are interesting and illuminating as usual, Tortoise. Thank you for them. On the whole, I think government ventures tend to be more exercises in passing stolen (confiscated through taxes) money around among cronies than exercises in efficiency or profit making, which means that their motivation is to drag out a given job as long as possible, in order to milk the maximum funding, rather than being efficient in an effort to maximize profits. The nature of the beast (it uses stolen money) causes it to get poor results.

Another consideration is that government ventures never, ever, have to produce any results. Once government funding starts, the will o' the wisp may remain just out of reach for decades on end, and everyone will agree that the only problem is lack of funding.

Meanwhile, in the real world ...

Some people think the government should be funding technology ventures instead of rich people because of fairness, social justice, or to fund "what rich people won't fund". Such individuals will have to acknowledge (or not) that even though every branch of the government has dabbled in venture capital at some point, all of them have produced horrifically poor results by any metric you care to use. A private venture capitalist would have lost his job if he performed that poorly.

Your comments are interesting and illuminating as usual, Tortoise. Thank you for them. On the whole, I think government ventures tend to be more exercises in passing stolen (confiscated through taxes) money around among cronies than exercises in efficiency or profit making, which means that their motivation is to drag out a given job as long as possible, in order to milk the maximum funding, rather than being efficient in an effort to maximize profits. The nature of the beast (it uses stolen money) causes it to get poor results.

Another consideration is that government ventures never, ever, have to produce any results. Once government funding starts, the will o' the wisp may remain just out of reach for decades on end, and everyone will agree that the only problem is lack of funding.

Meanwhile, in the real world ...

Yeah, good point. They can just continue to reach into our pockets. Amtrak is an example...it doesn't make ends meet, so they just reach into our pockets...it amounts to forcing us to buy tickets. Not saying Amtrak should be defunded, just noting how it works...what the solution to that is, I'm not sure, but removal of unions might be a first step to making it a business rather than a jobs program.

Americans should take some pride in our venture capital industry. Many people do not know that it was created by a French immigrant (who became a US general in WW2) by the name of Georges Doriot shortly after the war. To this day the US venture finance industry is the envy of the world.

According to the (self-serving) statistics of the venture capital industry, 11% of jobs and 21% of GDP in the US comes from venture capital backed companies. If you look at how little of GDP is actually invested as venture capital every year -- less than 0.1% in 2010 -- it is the bargain of the century. We piss more money away on half the major agencies in the Federal government with far less value to show for it.

Keynesian puppets talk about multipliers of 1.1x or 1.2x that never materialize in the real world. The venture capital ecosystem realizes tangible multipliers that are vastly larger than the best wet dreams of the Keynesians. Yet the solution to our lack of economic growth is to steal money from the venture capital ecosystem and give it to the Keynesian bureaucrats. That has FAIL written all over it under the naive presumption that everyone is interested in jobs and economic growth.

T you really should write up an article summarizing the above, and the earlier post regarding the consequences to VC over taxing the super rich. Submit it to something like Brietbarts Big Government or somewhere that will distribute it widely.

I didn't know any of that stuff. The partisans need to be armed with facts.

Another consideration is that government ventures never, ever, have to produce any results. Once government funding starts, the will o' the wisp may remain just out of reach for decades on end, and everyone will agree that the only problem is lack of funding.

Meanwhile, in the real world ...

A very good description of NASA after the 80's. Even when I was there in the mid 80's, you could tell that there was a predominance of people who just coasted along on reputation. The glory days where people just got it done were gone.

Keynesian puppets talk about multipliers of 1.1x or 1.2x that never materialize in the real world.

Wow, they've lowered the bar a lot since the Great Recession began and it was all about 3x and 4x.

Two points:

First, Warren Buffet's point about carried interest is arguably correct. Basically, it is a bonus to money managers that is tied to the long-term capital gains of the investors whose money they are managing. Just because it comes out of the long-term capital gains of investors does not imply that it is a long-term capital gain for money manager. The argument is that this 20% cut of the capital gains is not inflation protected over the several years it takes to earn it, so the lower tax rate is proper. Capital gains tax rates are often a catchall for intrinsically long-term investments that are not inflation protected even if they do not involve the investment of capital per se.


Second, venture capital -- what fuels our technology sector -- is extraordinarily sensitive to the supply of liquid capital rich people have on hand. Rich people are the Limited Partners (LPs) behind venture capital firms. Note that this is required by government regulation, if you are not wealthy it is illegal for you to invest in tech startups. The supply of venture capital is very volatile, varying by an order of magnitude on a year-to-year basis. In lean years many tech startups go bust because the LPs do not have enough liquidity to fund the venture capital firms. Why the volatility? It is because the pool of venture capital is extremely sensitive to the free cash of rich people. When you abscond with the money of the wealthy, it creates a magnified reduction in the supply of capital available for venture capital.

People argue that it is only 10% here or 10% there but it does not show up that way at all in the venture capital pool, it is massively magnified. Venture capital supply follows the expected real return in the market very closely and accounts for things like inflation and tax losses; a 10% increase in taxes can put venture capital out of the money in many cases. And since rich people are the only people allowed to invest for the most part, they are not a fungible part of the ecosystem. With apologies, a poor person never funded my company. Anyone that claims to support both technology ventures and increasing the tax rates on those that fund them is a damned liar. If they had their way, Google, Facebook, Twitter, and myriad other companies that were built with the free cash flow of rich people would not exist. There is no two ways about it; venture capital has a very strict expected rate of return calculus that is grounded in the kind of mathematics that one finds in reality.

[addenda]
As a follow-on, since many of you may not be familiar with how venture capital funds work, I will sketch it out so that it is easier to understand why looting rich people seriously fucks entrepreneurs with a lot of intelligence and determination but no money.

Venture capital does not come from Obama's Stash^tm or the government. Most private venture capital funds don't actually have the money nominally in their fund sitting in a bank account. If they raise a $100M fund, that means they have commitments to contribute capital at a future date by rich people with cash. There are a number of circumstances and conditions under which this commitment is severable. The venture capitalists obtain this capital in modest chunks at a time from the rich people which is used to actually to fund investments in small companies.

The majority of venture startups require multiple funding rounds to become viable, usually with venture capital from the earlier rounds participating in later rounds. If you are an entrepreneur following the standard path with a venture and a capital call comes up short because the rich people are unable to meet their commitments, it is the entrepreneur and everyone that works for that company that gets screwed. They could even be a viable venture, it doesn't matter. Rich people's money is the lifeblood of the business. When you take their money, you take money from the people attempting to contribute real fundamental growth to the economy.

Some people think the government should be funding technology ventures instead of rich people because of fairness, social justice, or to fund "what rich people won't fund". Such individuals will have to acknowledge (or not) that even though every branch of the government has dabbled in venture capital at some point, all of them have produced horrifically poor results by any metric you care to use. A private venture capitalist would have lost his job if he performed that poorly.

The bitter taste in the mouth of these people is the one exception in all of government that has a track record for investing in viable technology companies is the US intelligence agencies. Unlike most of the clowns in government, they understand state-of-the-art technology and how it fits into the bigger picture. They may not have an express profit motive but they ride so close to the bleeding edge that they can often see the implications of technology long before the private sector does which gives them an advantage. In some ways they live in the future and they invest in the companies that will build it. They have a role that they fill in their niche.

In short, the tech sector money cycle is entrepreneurs begging venture capitalists begging rich people for cash that the rich people hope the government and economy will let them keep this year.

[addenda]
Americans should take some pride in our venture capital industry. Many people do not know that it was created by a French immigrant (who became a US general in WW2) by the name of Georges Doriot shortly after the war. To this day the US venture finance industry is the envy of the world.

According to the (self-serving) statistics of the venture capital industry, 11% of jobs and 21% of GDP in the US comes from venture capital backed companies. If you look at how little of GDP is actually invested as venture capital every year -- less than 0.1% in 2010 -- it is the bargain of the century. We piss more money away on half the major agencies in the Federal government with far less value to show for it.

Keynesian puppets talk about multipliers of 1.1x or 1.2x that never materialize in the real world. The venture capital ecosystem realizes tangible multipliers that are vastly larger than the best wet dreams of the Keynesians. Yet the solution to our lack of economic growth is to steal money from the venture capital ecosystem and give it to the Keynesian bureaucrats. That has FAIL written all over it under the naive presumption that everyone is interested in jobs and economic growth.

blogworthy.
I'm a little confused about only wealthy people being allowed by law to invest in tech start-ups. If that could be elaborated on, I'd appreciate it.

tortoise's post has been added to Best of DC and will show up in the blog eventually. SB doesn't like concatenating a lot of responses into one blog entry and prefers to use the blog as a driving force to the forum, so a link to this thread was added.

tortoise, if you want a different title, let us know.

tortoise's post has been added to Best of DC and will show up in the blog eventually. SB doesn't like concatenating a lot of responses into one blog entry and prefers to use the blog as a driving force to the forum, so a link to this thread was added.

tortoise, if you want a different title, let us know.

I'd have put the full compilation up, were it up to me.

Another consideration is that government ventures never, ever, have to produce any results. Once government funding starts, the will o' the wisp may remain just out of reach for decades on end, and everyone will agree that the only problem is lack of funding.

Meanwhile, in the real world ...

A very good description of NASA after the 80's. Even when I was there in the mid 80's, you could tell that there was a predominance of people who just coasted along on reputation. The glory days where people just got it done were gone.

Actually, I'm surprised to hear that. I was thinking more of things like ethanol, solar power, wind power, and public education. Public education does produce results, but the volume of dollars thrown at it appears to have long passed the point of diminishing returns.

"Willie Sutton, why do you rob banks?"
"Because that's where the money is."

I'm a little confused about only wealthy people being allowed by law to invest in tech start-ups. If that could be elaborated on, I'd appreciate it.

Startup ventures are only allowed to take investment from accredited investors. For a normal individual, this is someone with a net worth in excess of $1M excluding their primary residence. This law was nominally created to protect the little people from making bad investment decisions. It is Rule 501 and was created by the 1933 Securities Act.

This means, for example, that your friends and family cannot legally invest in your business unless they are millionaires. While the SEC and state regulators mostly ignore the routine violations of this law for tiny businesses, a business that plans to scale requires a clean and legal capitalization table ("cap table"). A cap table is a document that defines the equity ownership structure of a company (who owns how many shares of what classes of stock, warrants, options, etc).

The venture capital and tech industry asked to have this rule repealed in the Dodd-Frank bill, since it serves no real purpose while creating a lot of harm in that it unnecessarily restricts capital availability and excludes many potentially legitimate investors such as the aforementioned friends and family. Dodd-Frank actually made the definition even more restrictive than it used to be; it used to be possible for the upper middle class to sneak into the definition in certain cases, a loophole that was exploited regularly in Silicon Valley that no longer exists. This means, for example, that veteran startup entrepreneurs who are intimately familiar with the asset class and investment risk who do not quite meet the accredited investor criteria cannot invest in other startup ventures, whereas it used to be common for them to sneak in (diversifying their portfolio as it were).

Another consideration is that government ventures never, ever, have to produce any results. Once government funding starts, the will o' the wisp may remain just out of reach for decades on end, and everyone will agree that the only problem is lack of funding.

Meanwhile, in the real world ...

A very good description of NASA after the 80's. Even when I was there in the mid 80's, you could tell that there was a predominance of people who just coasted along on reputation. The glory days where people just got it done were gone.

Actually, I'm surprised to hear that. I was thinking more of things like ethanol, solar power, wind power, and public education. Public education does produce results, but the volume of dollars thrown at it appears to have long passed the point of diminishing returns.

In the Good Old Days, NASA would fly lots of spacecraft, make lots of mistakes, but also make a lot of progress in a short period of time. For example the Ranger program that JPL ran (IIRC), flew over a half dozen missions in the mid 60's, trying to hit the moon. They learned lots of stuff, not necessarily about space, regarding how to fly such a thing. When I was there in the 80's, they still had software development techniques that had been learned the hard way (basically, If It Ain't Broke, Don't Even Think About Fixing It).

Today, they run simulations for years, and every once in a great while, actually fly a mission. To an extent, this is a good thing that can make more progress than flying. But when you wait 2 or 4 or 8 years between missions, a great deal of assumptions have built up, a lot of jobs have turned over, and the organization forgets how to fly missions rather than just simulate.

I've got to wonder if the recent hypersonic test flight that was launched (and lost - for the second time), had some of these problems at the cause.

I'm a little confused about only wealthy people being allowed by law to invest in tech start-ups. If that could be elaborated on, I'd appreciate it.

Startup ventures are only allowed to take investment from accredited investors. For a normal individual, this is someone with a net worth in excess of $1M excluding their primary residence. This law was nominally created to protect the little people from making bad investment decisions. It is Rule 501 and was created by the 1933 Securities Act.

This means, for example, that your friends and family cannot legally invest in your business unless they are millionaires. While the SEC and state regulators mostly ignore the routine violations of this law for tiny businesses, a business that plans to scale requires a clean and legal capitalization table ("cap table"). A cap table is a document that defines the equity ownership structure of a company (who owns how many shares of what classes of stock, warrants, options, etc).

The venture capital and tech industry asked to have this rule repealed in the Dodd-Frank bill, since it serves no real purpose while creating a lot of harm in that it unnecessarily restricts capital availability and excludes many potentially legitimate investors such as the aforementioned friends and family. Dodd-Frank actually made the definition even more restrictive than it used to be; it used to be possible for the upper middle class to sneak into the definition in certain cases, a loophole that was exploited regularly in Silicon Valley that no longer exists. This means, for example, that veteran startup entrepreneurs who are intimately familiar with the asset class and investment risk who do not quite meet the accredited investor criteria cannot invest in other startup ventures, whereas it used to be common for them to sneak in (diversifying their portfolio as it were).

jesus.

thanks for clearing that up.

can small investors pool resources, incorporate the pool, and get that "person" accredited?

Two points:

First, Warren Buffet's point about carried interest is arguably correct. Basically, it is a bonus to money managers that is tied to the long-term capital gains of the investors whose money they are managing. Just because it comes out of the long-term capital gains of investors does not imply that it is a long-term capital gain for money manager. The argument is that this 20% cut of the capital gains is not inflation protected over the several years it takes to earn it, so the lower tax rate is proper. Capital gains tax rates are often a catchall for intrinsically long-term investments that are not inflation protected even if they do not involve the investment of capital per se.


Second, venture capital -- what fuels our technology sector -- is extraordinarily sensitive to the supply of liquid capital rich people have on hand. Rich people are the Limited Partners (LPs) behind venture capital firms. Note that this is required by government regulation, if you are not wealthy it is illegal for you to invest in tech startups. The supply of venture capital is very volatile, varying by an order of magnitude on a year-to-year basis. In lean years many tech startups go bust because the LPs do not have enough liquidity to fund the venture capital firms. Why the volatility? It is because the pool of venture capital is extremely sensitive to the free cash of rich people. When you abscond with the money of the wealthy, it creates a magnified reduction in the supply of capital available for venture capital.

People argue that it is only 10% here or 10% there but it does not show up that way at all in the venture capital pool, it is massively magnified. Venture capital supply follows the expected real return in the market very closely and accounts for things like inflation and tax losses; a 10% increase in taxes can put venture capital out of the money in many cases. And since rich people are the only people allowed to invest for the most part, they are not a fungible part of the ecosystem. With apologies, a poor person never funded my company. Anyone that claims to support both technology ventures and increasing the tax rates on those that fund them is a damned liar. If they had their way, Google, Facebook, Twitter, and myriad other companies that were built with the free cash flow of rich people would not exist. There is no two ways about it; venture capital has a very strict expected rate of return calculus that is grounded in the kind of mathematics that one finds in reality.

Very interesting. It really calls bullshit to those who think further taxing the rich is the answer.

Americans should take some pride in our venture capital industry. Many people do not know that it was created by a French immigrant (who became a US general in WW2) by the name of Georges Doriot shortly after the war. To this day the US venture finance industry is the envy of the world.

According to the (self-serving) statistics of the venture capital industry, 11% of jobs and 21% of GDP in the US comes from venture capital backed companies. If you look at how little of GDP is actually invested as venture capital every year -- less than 0.1% in 2010 -- it is the bargain of the century. We piss more money away on half the major agencies in the Federal government with far less value to show for it.

Keynesian puppets talk about multipliers of 1.1x or 1.2x that never materialize in the real world. The venture capital ecosystem realizes tangible multipliers that are vastly larger than the best wet dreams of the Keynesians. Yet the solution to our lack of economic growth is to steal money from the venture capital ecosystem and give it to the Keynesian bureaucrats. That has FAIL written all over it under the naive presumption that everyone is interested in jobs and economic growth.

T you really should write up an article summarizing the above, and the earlier post regarding the consequences to VC over taxing the super rich. Submit it to something like Brietbarts Big Government or somewhere that will distribute it widely.

I didn't know any of that stuff. The partisans need to be armed with facts.

can small investors pool resources, incorporate the pool, and get that "person" accredited?

In theory yes. In practice, structuring that in a way such that it would pass muster would be tricky.

There is a $5M minimum for non-natural persons to be accredited. Furthermore, to invest in that structure the only real exclusion that will allow the small investors to be accredited is to be directors, officers, etc in that company; this exposes those investors to real liabilities from which they otherwise would be shielded. Furthermore, there is (IIRC) a 500 investor limit before you have to register with the SEC as though you were a public company with all of the overhead that entails; to stay under the 500 investor limit, each investor would need to invest at least $10,000 on average. Furthermore, if your company exists primarily to make investments on behalf of the shareholders, there may be additional securities and structural rules related to the organization though that falls outside of my expertise (IIRC, you will be imputed to be a mutual fund).

So yes, technically you probably could do it if you spent enough on legal bills. It won't be worth the effort.

Yikes, Tortoise, I hadn't thought of that, but you're absolutely right - VCs totally rely on the willingness & ability of rich investors to join in on a particular VC fund.

Do you think that "sticking it to the rich" would have worse or fewer effects on angel investors? The angel investor community has gotten more organized & professional as well, and I think there are even angel LLCs, etc.

Angel investors are the ones who usually make the earliest-stage investments in 2-person embryonic stage startups, before the later rounds when VCs tend to step in with the bigger checks. I'd think that having angel investment dry up would do harm that doesn't show up quite as quickly as VC money drying up, but might have longer-term affects as it kills off the companies that would've become next year's (or several years after that) big success stories.

The right of a person to the product of his own labor is the foundation of economic liberty, declares Dr. F. A. Harper, in his scholarly essay, Liberty: A Path to Its Recovery. He points out that “the question at issue is how to distinguish between what is mine and what is thine.”

etc.

- Howard Buffet, 1956. The apple has fallen too far away from the tree.

I pulled this speech out of total obscurity on Monday. When I googled the words, there were about three hits, and they were from years earlier. On Thursday the speech was on the Wall Street Journal op-ed page. Do we have a WSJ mole, or did some other blog post the quote between Monday and Thursday?