Guest Opinion: Obama’s latest plan might not help

The views expressed in Guest Opinions represent only those of the author and are in no way endorsed by Richmond BizSense or any BizSense staff member.

The policies coming out of Washington are changing faster than we have time to digest them.

President Obama proposes to allocate $30 billion of unspent stimulus money to support lending to small businesses. This is a nice gesture, but small business needs equity, too.

And although small businesses certainly need access to credit, borrowing is not a good way to start a business from scratch.

Obama also proposed eliminating capital gains tax on the sale of small businesses. This also is good, but many small businesses won’t be for sale anytime soon, so it’s a moot point.

I’m not a big fan of subsidies or more government involvement in business, but if the money is going to be spent (and it will be), let’s do something smarter than just make a lot of loans. After all, I thought we were trying to reduce borrowing, not encourage it.
What if half the money were allocated to support seed fund investments – maybe through a tax credit approach – like the investment tax credit for capital investment in plant and equipment? At least that way the investment decisions would not come from inside the Beltway.

This could address the huge gap between what most entrepreneurs can raise from friends and family and what they need to get them to the point where they might be ready for venture financing.

Innovation and entrepreneurship are two of our greatest strategic advantages in the world economy. Certainly the nurturing and support of these assets is as worthy a cause as any.
The root of the problem is that the financial structure of private venture funds today virtually precludes them from making investments smaller than $5 million.

Many startups need something more like $100,00 to $500,000. There are programs, such as SBIR grants, etc., that sometimes fill this gap, but not all startups involve research.

What we have is a market imperfection that leaves a gap in funding at a critical stage for startups. In the past few years, CIT has begun to address this need with its appropriately titled “Gap Fund.”

I applaud them, but it’s a drop in the bucket.

A good example of what public support for early-stage funding can do is Pennsylvania’s Ben Franklin Technology Partnership. Starting with minimal state funding, this public-private initiative has had multibillion-dollar economic impact over more than 25 years, as determined by independent third-party assessments.

Large venture funds contribute their expertise, and sometimes their capital, making early-stage funding more available, giving them more prospects to fund once they mature to an appropriate stage.

Almost 20 years ago, I participated in the JLARC CIT Review process. I naively suggested that through CIT, Virginia could form its own “Thomas Jefferson Partnership” and get a huge economic development return on its investment. Although there was some interest, the notion of investing state funds in private enterprise was still too radical.

Never mind that Virginia state employee pension funds were heavily invested in venture capital funds in other states – there just seemed to be a philosophical aversion to any direct investment. So now, these many years later, I’m encouraged by the formation of the Gap Fund. But it’s just not enough.

I start to hyperventilate when I realize that I am advocating greater involvement by government, and in particular the federal government, in small business, but it’s not like they aren’t already involved. And besides, this really is a tax cut that would be especially useful for high earners who are about to lose the benefit of the Bush tax cuts. Maybe if Virginia can get past its “not invented here” aversion to new ideas, our delegation can lead the way to help some of that stimulus money actually find its way down to Main Street where it will make a difference.

The views expressed in Guest Opinions represent only those of the author and are in no way endorsed by Richmond BizSense or any BizSense staff member.

The policies coming out of Washington are changing faster than we have time to digest them.

President Obama proposes to allocate $30 billion of unspent stimulus money to support lending to small businesses. This is a nice gesture, but small business needs equity, too.

And although small businesses certainly need access to credit, borrowing is not a good way to start a business from scratch.

Obama also proposed eliminating capital gains tax on the sale of small businesses. This also is good, but many small businesses won’t be for sale anytime soon, so it’s a moot point.

I’m not a big fan of subsidies or more government involvement in business, but if the money is going to be spent (and it will be), let’s do something smarter than just make a lot of loans. After all, I thought we were trying to reduce borrowing, not encourage it.
What if half the money were allocated to support seed fund investments – maybe through a tax credit approach – like the investment tax credit for capital investment in plant and equipment? At least that way the investment decisions would not come from inside the Beltway.

This could address the huge gap between what most entrepreneurs can raise from friends and family and what they need to get them to the point where they might be ready for venture financing.

Innovation and entrepreneurship are two of our greatest strategic advantages in the world economy. Certainly the nurturing and support of these assets is as worthy a cause as any.
The root of the problem is that the financial structure of private venture funds today virtually precludes them from making investments smaller than $5 million.

Many startups need something more like $100,00 to $500,000. There are programs, such as SBIR grants, etc., that sometimes fill this gap, but not all startups involve research.

What we have is a market imperfection that leaves a gap in funding at a critical stage for startups. In the past few years, CIT has begun to address this need with its appropriately titled “Gap Fund.”

I applaud them, but it’s a drop in the bucket.

A good example of what public support for early-stage funding can do is Pennsylvania’s Ben Franklin Technology Partnership. Starting with minimal state funding, this public-private initiative has had multibillion-dollar economic impact over more than 25 years, as determined by independent third-party assessments.

Large venture funds contribute their expertise, and sometimes their capital, making early-stage funding more available, giving them more prospects to fund once they mature to an appropriate stage.

Almost 20 years ago, I participated in the JLARC CIT Review process. I naively suggested that through CIT, Virginia could form its own “Thomas Jefferson Partnership” and get a huge economic development return on its investment. Although there was some interest, the notion of investing state funds in private enterprise was still too radical.

Never mind that Virginia state employee pension funds were heavily invested in venture capital funds in other states – there just seemed to be a philosophical aversion to any direct investment. So now, these many years later, I’m encouraged by the formation of the Gap Fund. But it’s just not enough.

I start to hyperventilate when I realize that I am advocating greater involvement by government, and in particular the federal government, in small business, but it’s not like they aren’t already involved. And besides, this really is a tax cut that would be especially useful for high earners who are about to lose the benefit of the Bush tax cuts. Maybe if Virginia can get past its “not invented here” aversion to new ideas, our delegation can lead the way to help some of that stimulus money actually find its way down to Main Street where it will make a difference.

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Bruce Anderson
Bruce Anderson
12 years ago

Why not set up a tax credit program that allows an outside equity investor in a qualified business to take a portion of his investment as a federal income tax credit over a pre-determined time period – say five to seven years. A program of that nature would make it easier to attract seed capital to start-ups, since it would reduce the amount of investment that the outside entity has at risk.