Value Iowa
>> Tuesday, October 25, 2005
This essay is a work in progress and I am asking you to help me edit it. Comments and questions are, of course, welcome, as well as help with structure, grammer and spelling. Challenge me on points that you think are weak or need further discussion.
For those wishing to work in MS Word, right mouse click on this link and select "Save Target As..." Once you are done, email it back to me.
For those wishing to work in MS Word, right mouse click on this link and select "Save Target As..." Once you are done, email it back to me.
I present to you "Value Iowa"
Governmental agencies should not compete against their own citizens. Government also should not treat any single company or individual any differently than everyone else. For example, Iowa has a lot of seed companies and they all should be treated the same throughout the entire state. One particular seed company shouldn't receive additional state funds at the expense of every other seed company.
There are people that make their living by investing in start-up companies and other high-risk ventures. They expect to lose money on a portion of their portfolio; however, they also expect to make it "big" with others. They are evaluating proposals every week. Studying the marketplace and identifying risks is their full-time job. Even with all of this experience and expertise, they don't always get it right and can lose their entire portfolio to a bad investment. That's one of the risks they accepted when first starting to do business as a venture capitalist (VC).
Now the State of Iowa steps in with bags of cash and a plan. However, the plan isn't the long-term goal of creating a company that can stand the test of time and market, but a short-term goal of creating jobs in Iowa. This is a lofty idea on paper, but let's look at the practical aspects.
First, small businesses create more jobs faster than big businesses. Most small businesses only need a handful of employees and relatively small start-up capital. This is not good politically, because a single grant "creating" hundreds of jobs looks better in the newspaper than a small grant "creating" two jobs. However, spending the $800,000,000 Iowa Values Fund by writing a $10,000 check to 80,000 small businesses probably would have given our state's entrepreneurs [Note: government doesn't create jobs any more than a mouse creates cheese] the capital leeway to generate tens of thousands of new jobs.
This leads to issue number two, why fund one particular company over everyone else? Why play favorites? Shouldn't we treat every company equally? The competition for consumers typically leads companies to offer better products at a lower price. Handing a bag of cash to one particular company doesn't necessarily make them successful and it actually reduces the amount of investment money they might have received had the government not gotten involved.
Third, government funding stifles growth and competition. Who can compete against a company that just received a bag of cash with few strings attached? Here's a real life example, a hotel wants to add a water park with slides and rides and such. Guests can get in as a part of their room rate, while non-guests can pay a fee to get in and play. During the planning phase it was discovered that a water park was going to be built close by using government funding. The hotel couldn't compete against it so decided not to pursue the water park idea. Why should the government provide entertainment to the detriment of private enterprise? The hotel would have added to their property value, thus increasing property taxes and they would have generated more income from the facility, thus generating more tax income. Instead, tax money is being spent to provide the same service.
Fourth, typical VCs want to be on the board of directors, they want to see numbers and they want to see results. VCs are willing to jump in and provide leadership if things go wrong. The Iowa Values Fund administrators want to see the expectations up front, but don't follow through to see if the results match and cannot provide leadership. Leadership and expertise is more important to a start-up enterprise than money.
Lastly, this fund's goal was to increase economic activity with the extra $800,000,000 that was languishing in the State's treasury: $320 per Iowan. For a family of 4, that comes to $1,280. Why not refund taxpayers this excess? Most families would have spent it on school supplies, home improvements, vehicles and the like. Wouldn't that also stimulate economic activity? Why yes it would.
Iowa is last on the list of states friendly to start-up businesses. The Iowa Values Fund is one of the causes. A smarter policy to pursue would be tax reform. A simpler tax code and lower tax rate make Iowa competitive against other states. Allow consumers to decide which companies survive and which fail, not politicians. Government policy and regulation is a drain on business. Let's make sure we do the smart thing.
There are people that make their living by investing in start-up companies and other high-risk ventures. They expect to lose money on a portion of their portfolio; however, they also expect to make it "big" with others. They are evaluating proposals every week. Studying the marketplace and identifying risks is their full-time job. Even with all of this experience and expertise, they don't always get it right and can lose their entire portfolio to a bad investment. That's one of the risks they accepted when first starting to do business as a venture capitalist (VC).
Now the State of Iowa steps in with bags of cash and a plan. However, the plan isn't the long-term goal of creating a company that can stand the test of time and market, but a short-term goal of creating jobs in Iowa. This is a lofty idea on paper, but let's look at the practical aspects.
First, small businesses create more jobs faster than big businesses. Most small businesses only need a handful of employees and relatively small start-up capital. This is not good politically, because a single grant "creating" hundreds of jobs looks better in the newspaper than a small grant "creating" two jobs. However, spending the $800,000,000 Iowa Values Fund by writing a $10,000 check to 80,000 small businesses probably would have given our state's entrepreneurs [Note: government doesn't create jobs any more than a mouse creates cheese] the capital leeway to generate tens of thousands of new jobs.
This leads to issue number two, why fund one particular company over everyone else? Why play favorites? Shouldn't we treat every company equally? The competition for consumers typically leads companies to offer better products at a lower price. Handing a bag of cash to one particular company doesn't necessarily make them successful and it actually reduces the amount of investment money they might have received had the government not gotten involved.
Third, government funding stifles growth and competition. Who can compete against a company that just received a bag of cash with few strings attached? Here's a real life example, a hotel wants to add a water park with slides and rides and such. Guests can get in as a part of their room rate, while non-guests can pay a fee to get in and play. During the planning phase it was discovered that a water park was going to be built close by using government funding. The hotel couldn't compete against it so decided not to pursue the water park idea. Why should the government provide entertainment to the detriment of private enterprise? The hotel would have added to their property value, thus increasing property taxes and they would have generated more income from the facility, thus generating more tax income. Instead, tax money is being spent to provide the same service.
Fourth, typical VCs want to be on the board of directors, they want to see numbers and they want to see results. VCs are willing to jump in and provide leadership if things go wrong. The Iowa Values Fund administrators want to see the expectations up front, but don't follow through to see if the results match and cannot provide leadership. Leadership and expertise is more important to a start-up enterprise than money.
Lastly, this fund's goal was to increase economic activity with the extra $800,000,000 that was languishing in the State's treasury: $320 per Iowan. For a family of 4, that comes to $1,280. Why not refund taxpayers this excess? Most families would have spent it on school supplies, home improvements, vehicles and the like. Wouldn't that also stimulate economic activity? Why yes it would.
Iowa is last on the list of states friendly to start-up businesses. The Iowa Values Fund is one of the causes. A smarter policy to pursue would be tax reform. A simpler tax code and lower tax rate make Iowa competitive against other states. Allow consumers to decide which companies survive and which fail, not politicians. Government policy and regulation is a drain on business. Let's make sure we do the smart thing.
