Search This Blog

Saturday, October 01, 2011

Government "Venture Capital" vs. Private Venture Capital

Megan McArdle writes in the Atlantic about the difference between government venture capital and private venture capital. By far the biggest difference is not even mentioned.

There is a dramatic and critical difference between government loan guarantees and private venture capital (PVC). The PVC investor expects to make a bundle from his investment, typically by getting an equity stake and cashing out when the successful firm goes public. That’s the best case scenario for PVC. If the company fails, they’re out their seed capital.

When the government gets into the venture capital business, risking your money and mine, what’s the payoff for the people whose capital is at risk? What, exactly do the taxpayers get in return for guaranteeing the loan? We know what they lose if the company fails, but exactly what is the payoff for the taxpayers if the company’s successful. Suppose Solyndra had been a success. The other investors would have make lots of money, the executives would have made lots of money and the banks would have made money. But what would the taxpayers have gotten in return for the risk they took?

Even the far-Left Think Progress admits that government venture capital is a designed lose, not make, money. The only argument is about the size of the loss for the taxpayer.

So the entire loan guarantee program is a designed money loser. Is there no possible payback to the public whose money is at risk? The only return on investment that is cited by supporters of loan guarantees is in the form of tax revenue generated by companies and employees. In other words, there is an assumption that the built-in billions of dollars of guaranteed losses to the taxpayer will, at some time in the future, be offset by property and income taxes if these ventures are successful.

That’s an incredibly weak argument and explains that the case being made by the Left for solar power development in the US is chauvinism: “We can’t let the Chinese get ahead of us in solar technology.” I outgrew that kind of argument is grade school.

No comments: