Ray Jay,

I'm not saying that there is no venture capital out there. I'm saying that:

a) it was less active now during a recession than it was before (largely a result of getting burnt), and
b) it is not usually that long term and once you look long term, bonds are a much safer bet for investors

On (a) here's some figures:

http://www.nvca.org/index.php?option=co ... Itemid=102 - the link for Q2 2011 Investment

Total investment ($billions - not adjusted for inflation*)
2004: 21.8
2005: 22.7
2006: 26.3
2007: 30.4
2008: 28.7
2009: 19.5
2010: 23.3

Looking at the quarterly data, it's clear that until 2008 the amounts were rising to over $7Bn a quarter, and then in the last quarter (when Lehmans had gone and the whole mess became apparent) investment shrunk to $5Bn and then down to under $4Bn for a time, then remained at around $5Bn until the start of this year. 2011 investment has risen back up to around $7Bn a quarter (although with inflation* this is still lower than before). If the latest set of economic problems don't cause a reduction, then 2011 looks set to be comparable to 2006.

But even if it is, there is some $15Bn that was not invested during the recession and early recovery, a good 25-30% reduction in available capital. Maybe it was just a lack of decent business plans, maybe it was that a sound business plan in 2007 looks like a crock in 2010. Or maybe it's because venture capitalists were investing less capital either because they had less to invest or because they had safer places (like government debt) to go to in a bad climate.

*Inflation from 2004-2011 has made a 2004 dollar worth about $1.20 in today's money. So in real terms the current rate is even lower than before

ray

But getting back on point, the venture capitalists are always looking for good ideas. Sure they will take 30 - 50% of your company, but if it is a new idea that can make it big, it is certainly worth it. The funding that Perry is doing in Texas, and that the US did with Solyndra, and what Massachusetts has done as well is being sold as future profitable technologies with high paybacks. The VC's are very skilled at evaluating risk and reward. Yes, they like payouts sooner rather than later, but if the idea is good, and it works in the marketplace, these greedy bastards will fund it.

They don't operate in a competitive vacuum...
Consider that Governor Perry wanted employment in Texas. (Being a job creator and all) The high tech companies can establish their businesses just about anywhere.( perhaps they require exceptional access to Internet bandwidth) ... but generally they can establish a business anywhere.
What makes Texas more attractive than another state or Taiwan?
The greedy VC's? With great risk I think they deserve great reward. When I worked for two start ups the VCs we paraded in front of all said the same thing. 8 of 10 projects fail miserably. 1 becomes a going concern and one becomes wildly sucessful. They require a great return to finance the 8 failures...
These VCs are lookiing for every angle when they choose where to situate their business. Governments are marketing their locations with every thing they have to offer...Including tax breaks, labour force support etc.
You can't, as a government, just sit back and let market forces decide where the next technology hub is going to develop. If you do, a competing government will establish reasons why their hub makes more sense. resource based industries have their resource to attract investors... but in their case, there may be dozens of competing resource centres.... Why develop this one and not that one? In some cases its down to how the governments package their location...
Direct investment by government is one way to ensure that a business is established. But, if its "grants", without co-ownership its really risky. Ownership allows the government partner a say in what happens for the long term. (Or at least the term where the industry has really established in the region and the government can cash out...) Grants only get the company into the door. When the grant dries up, they can and often do port their business elsewhere for another offer... Or close having pulled in nice salaries while running the start up...
There is no good reason why the nation of S Korea should have become a world leader in internet infrastructure and internet software and hardware development. The only reason it happened was their governments investment in the basic business infrastructure. Today it employs hundreds of thousands in Korea. The spin off benefits, and the busines culture that can grow out of succesfull core start ups can be as fundamental as they were in S Korea. Or fail...
But because some fail doesn't mean that they aren't a good idea. And US non-involvement in competing for these ventures is sure to give the governments competing to attract them an advantage over the non-competitive regions. Being pure as the driven ideology, and staying away from government involvment in "market decisions" (like where to build a business) doesn't mean that competing governments will also be boy scouts and let the markets make up their minds on their own ... They won't and they'll eat the lunch of those who sit on the sidelines and pray for good times based on the belief that they shouldn't get their hands dirty.

danivon wrote:Ray Jay,

I'm not saying that there is no venture capital out there. I'm saying that:

a) it was less active now during a recession than it was before (largely a result of getting burnt), and
b) it is not usually that long term and once you look long term, bonds are a much safer bet for investors

On (a) here's some figures:

http://www.nvca.org/index.php?option=co ... Itemid=102 - the link for Q2 2011 Investment

Total investment ($billions - not adjusted for inflation*)
2004: 21.8
2005: 22.7
2006: 26.3
2007: 30.4
2008: 28.7
2009: 19.5
2010: 23.3

Looking at the quarterly data, it's clear that until 2008 the amounts were rising to over $7Bn a quarter, and then in the last quarter (when Lehmans had gone and the whole mess became apparent) investment shrunk to $5Bn and then down to under $4Bn for a time, then remained at around $5Bn until the start of this year. 2011 investment has risen back up to around $7Bn a quarter (although with inflation* this is still lower than before). If the latest set of economic problems don't cause a reduction, then 2011 looks set to be comparable to 2006.

But even if it is, there is some $15Bn that was not invested during the recession and early recovery, a good 25-30% reduction in available capital. Maybe it was just a lack of decent business plans, maybe it was that a sound business plan in 2007 looks like a crock in 2010. Or maybe it's because venture capitalists were investing less capital either because they had less to invest or because they had safer places (like government debt) to go to in a bad climate.

*Inflation from 2004-2011 has made a 2004 dollar worth about $1.20 in today's money. So in real terms the current rate is even lower than before

I interpret your data as saying there is a very dynamic marketplace at work. There is a tendency for government interventionists to believe that what we had before was better, so the government should stimulate demand when people save too much, and then it should encourage saving when people save to little. We provide funds to companies when VC's are investing less. We try to prop up housing prices when they decline, and then we try to create programs to subsidize housing for those who cannot afford the propped up prices.

But the stats that you cite over the last several years on VC investing show that markets work. Investing is a function of capital availability and uses of that capital. We have supply and demand and we get to a dynamic market. It ain't perfect, but it works way better than a government pretending that it knows better and can navigate that complexity for better results.

Maybe it was just a lack of decent business plans, maybe it was that a sound business plan in 2007 looks like a crock in 2010. Or maybe it's because venture capitalists were investing less capital either because they had less to invest or because they had safer places (like government debt) to go to in a bad climate.

I vote that it is a combination of all of the above, and maybe some reasons that your creative mind has not considered. We need marketplaces to figure this stuff out.

Ricky:

These VCs are lookiing for every angle when they choose where to situate their business.

Often the businesses are situated where the founders' live, and not where the VC's are. In Mass. we do very little to encourage business, except have MIT and Harvard located in our state.

Take a look at the businesses that Perry has funded. My best guess is that the founders are in Texas and are politically connected there. They want their business to be close to their home. They got good terms from the Governor. All it cost them were some campaign contributions and some favors to be named later; the VC's said no or wanted too big a share, so they went to their buddy Rick. (This is just my guess. Go ahead and satisfy yourself that it is based on some industrial policy that Perry's policy wonks figured out.)

Ray Jay wrote:I interpret your data as saying there is a very dynamic marketplace at work. There is a tendency for government interventionists to believe that what we had before was better, so the government should stimulate demand when people save too much, and then it should encourage saving when people save to little. We provide funds to companies when VC's are investing less. We try to prop up housing prices when they decline, and then we try to create programs to subsidize housing for those who cannot afford the propped up prices.

I don't know if what we had before was better (I tend to think that generally things will improve over time). I know that what we have now is not very good, and the longer things stay as they are, the more problems we'll have for the future.

But the stats that you cite over the last several years on VC investing show that markets work. Investing is a function of capital availability and uses of that capital. We have supply and demand and we get to a dynamic market. It ain't perfect, but it works way better than a government pretending that it knows better and can navigate that complexity for better results.

Yeah, fair enough, 'we have a dynamic market' in that the market goes through changes. But we have a 'stagnant market' in that at the moment, there's little growth following a recession. The economy is pretty much stagnant. That's why there are more unemployed than usual, why investors are avoiding risk and accepting low yields, why companies are struggling and why the US - and the world - is having problems with money.

What's more, investors are not very confident, and that lack of confidence is itself a self-fulfilling prophesy when writ large.

We understand what a bubble is, it's when the market gets over-confident and people jump into things that are unsustainable. At the other end you can have a situation where caution means people refrain from taking risks. But it is risk-taking that capitalism needs. If investors are not going to do it, then who?

Maybe it was just a lack of decent business plans, maybe it was that a sound business plan in 2007 looks like a crock in 2010. Or maybe it's because venture capitalists were investing less capital either because they had less to invest or because they had safer places (like government debt) to go to in a bad climate.

I vote that it is a combination of all of the above, and maybe some reasons that your creative mind has not considered. We need marketplaces to figure this stuff out.

I expect that it is a combination of them. The point being that it is not just about having a good business case, is it? It's about what is available and how cautious investors are being.

However, the 'market' is not that special - it's just the cumulative effect of a lot of people making decisions. What the market as a whole is telling us is not that everything is hunky-dory. The market is telling us that it needs something to happen if we are to get back to growth.

However, the 'market' is not that special - it's just the cumulative effect of a lot of people making decisions.

That's right. My view is that it is a lot smarter than a lot of voters making a decision on who to elect, that funnels into a politician with power who needs money and popularity to sustain his career; by the nature of his job, the politician has to become sophisticated as it relates to the media, and the public's perception of his contribution. Meanwhile, for the VC to be good at his job, he needs to become sophisticated in analyzing business trends, determining whether the business owners are competent and talented, what the market place looks like, and the risks and rewards inherent in the investment.

Which horse do you want to bet on? If you bet on the wrong horse (the politician) you are less likely to be a winner. It may work out on occasion, but in general it seems to me that you are contributing to a mis-allocation of resources at best, and corruption at worst.

By the way, this is just one market. It's the VC market. Investors can choose to put their money into the stock market, or the private equity market, or commodities, or a bank account. If capital is not choosing to go to the VC market, there may be a reason. Meanwhile, the business owner with an idea may choose to get his funding from somewhere else. Maybe family and friends ... maybe the private equity market... Maybe public companies. Maybe he rejigs his business plan to be less capital intensive.

ray

Often the businesses are situated where the founders' live, and not where the VC's are. In Mass. we do very little to encourage business, except have MIT and Harvard located in our state.

Harvard has a 28 billion dollar endowment and an annual non-profit budget of 3.7 billion. it still costs $53,000 a year to go to school there.
But yes Harvard and MIT are enormous resources that attract certain kinds of industry to Mass. Its a pefect example of how hubs of industry are created by providing an infrastructure and a network of associated companies.
But it doesn't really answer the question of why non-intervention is often simply a way of surendering to competition.by govenrments who are intervening....
What about places that find they didn't have a Harvard or were actuially losing their best people to MIT?
India now competes with MIT and Harvard in keeping its best and brightest working in their high tech industries. Their government funded the educational institutions and the initial incubators for developing industries and now India has a competiive high technology sector.
If it were left to the local VC in India, they wouldn't have had the educated class that they required to build their new industries...That took government intervention.
i'm not defending how Perry went about his little project. I'm sure its as sleazy as his scheme to insure old texans.
All I'm saying is that there are circumstances where the markets aren't going to respond but where the population aspires to more than what they have... And government neeeds to respond in those circumstances in order that their citizens aspirations can be met.
What if you didn't have an MIT or Harvard? Would you want your government to build one, the way india built their techology institute?

I do think you can make a strong case for public universities, and there are many. Clearly you need some balance between a world of only private interests and a world that suffocates private interests. My view is that we've just gone too far towards suffocation. When it doesn't work, we call for more suffocation.

You've cited South Korea, and I don't have time to become an expert on their political economy. But I do think that you can look at countries that have created positive business climates and have done just fine. Take a look at Singapore and Hong Kong. If you create reasonable and low taxes, simplify good regulations, and enforce property rights you can develop a growing economy.

Would you agree that there has to be a high burden before the government picks winners and losers in the private sector? It's one thing to support an industrial policy, but it is another to pick and choose companies, which is what is happening here at the federal and state level. Given the tendency for public funding to be politicized and inefficient, how do you control the political class so that they don't confuse their interest with the state's?

ray

You've cited South Korea, and I don't have time to become an expert on their political economy. But I do think that you can look at countries that have created positive business climates and have done just fine. Take a look at Singapore and Hong Kong. If you create reasonable and low taxes, simplify good regulations, and enforce property rights you can develop a growing economy.
Would you agree that there has to be a high burden before the government picks winners and losers in the private sector? It's one thing to support an industrial policy, but it is another to pick and choose companies, which is what is happening here at the federal and state level. Given the tendency for public funding to be politicized and inefficient, how do you control the political class so that they don't confuse their interest with the state's

South Korea and Singapore often practice direct government intervention in their industries.. Especially what they consider to be strategic industries. .In effect Ray, they are saying that the interests of the state must be met equally with the interests of the industry owners...

I don't like the idea of government intervention that often Ray. I'm only pointing out that unbending ideological attitude that excludes the posibility of govenrment intervention, even direct intervention, leaves a nation susceptible to the whims of international corporations and the competition from neomercantilist nations that compete directly for industries and their attached jobs.
Reagan, and his successors since him, largely sat back and simply watched market forces move industries and jobs out of the US. Blithely ignoring the competitive forces and ignoring the fact that the short term goals of the international corporations don;'t necessarily serve the interests of its citizens is pure ideological blindness.

Government intervention makes sense when there is a strategic vision that goes beyond the next quarter, the next election cycle, the next decade. What is worrisome about the US is that your political system seems to have imploded and created a gridlock so that there is no possibility of a clear national vision on any particular issue. . Where Eisenhower could envision a network of highways to connect the nation better and get it done, where Kennedy could focus the nation on technology with the race to the moon, now the vision from the right is so small. (Not that the "end product isn't envisioned as a remarkable achievement, its the road to that goal that is so sparesly planned.)
That only excludes the possibility of a strong national strategy, that might include government intervention to at least get started.
One of the things that so-called conservatives trumpet right now is the construction of the new oil pipeline. They see that as a great opportunity for private enterprise to contribute to the US economy, job growth and improved energy security. The only reason that even exists as a possible policy choice is because of strong and direct government intervention that established the Alberta oil sands as a viable resource.
But you'll never hear that. There is no balance.
One of the more inflexible types on this board recently called me an ideologue. Because, I suppose , I constantly refute the bland nostrums like "govenment shouldn't pick winners and losers" with evidence of instances where govenrment has successfully enhanced a nations progress with a national strategy that did indeed pick "winners and losers". (Bcause someone has to actually do the work...) This new crop of self styled conservatives don't like references to how strategies have succeeded. A reasdon why all kinds of solutions can be applied to achieve postiive results. And how all kinds can sometimes fail. If I sound like an ideologue by repeating these arguements, its becasue many keep repeating the nostrums as if they were self evident. They aren't. Many are often fallacious when compared with real life experiences. Perhaps it would be worth investigating how things have actually worked before latching on to simplistic notions.

Perry chose his ETF as a way to directly create high paying, high value jobs in Texas... A positive motive. That he may have turned it into a slush fund for his cronies may be true. But that doesn't mean that other jurisdictions haven't successfully created techology hubs (like the one around MIT) . It just means that Perry is personnally corrupt or perhaps clueless to those around him who are corrupt. (I favour this theory.)
But it is interesting that he found the idea of direct intervention a way to create jobs that weren't below minimum wage, isn't it?

But it is interesting that he found the idea of direct intervention a way to create jobs that weren't below minimum wage, isn't it?

Sure it's interesting. For the most part politicians will use whatever argument they can to advance their personal interest. They will develop talking points from wherever they can find them, whether they be left, right or center. That's how they become successful.

Was it not also in Texas' interest? Perry was not just coming up with talking points, he was taking action.

danivon wrote:Was it not also in Texas' interest?

Maybe ... have you seen a list of the companies in which they invested and the terms of the investment? What were the alternate uses for the funds that were spent?

No. How many net jobs did it create, and how much does that affect revenues at State and Federal level?

sure ... let's keep an open mind and factor everything in.

http://www.star-telegram.com/2011/08/26 ... ed-by.html

There's evidence of both some cronyism with attendant failures, and some real successes in the program.
ZRA Pharma seems to have been a particular success.
If you read the WSJ account,
online.wsj.com/.../SB1000142405270230476060457642826289728
you get the highlights of the cronyism.
The story linked above (star telegram) talks to some of the CEOs who attest to the success of the program. ZRA talks about how much easier it was to get private VC capital after the initial ETF investment.
Does Perry's use of this program disqualify him as a Tea party member now?