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June 15, 2010 (Vol. 30, No. 12)

Tax Breaks Would Lure Investors

Revamping Capital Gains and Focusing on Incentives Could Increase Angel Investing

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    J. Leslie Glick, Ph.D.

    Early last year (February 1, 2009) in this column, I suggested that since venture capital (VC) has a proven impact on job creation and the economy, and because VC firms were then experiencing much difficulty in raising funds for investing not only in start-ups and early-stage ventures but even in late-stage ventures, that the federal government invest as a limited partner in VC firms.

    As I subsequently documented in a proposal sent to key government leaders, historical data indicated that if over a 20-year period the U.S. government invested $15 billion annually as a limited partner in VC firms, an estimated 1.3 million jobs would be created in 5 years and 6.8 million jobs in 20 years. Key technologies benefiting society would be developed and commercialized, and the government would ultimately record a positive return on its investment capital.

    Indeed, based on VC returns achieved from 1988 through 2007, if the government had made 20 annual investments of $15 billion in U.S. VC firms, the $300 billion total investment would have yielded a total return of around $2.2 trillion.

    For this scheme to work, three things need to happen. First, the government has to place its investment capital in a fund of funds managed by an independent investment manager. Second, all VC firms above a minimum size and operating history must be eligible for such funds, which would be disbursed in proportion to the magnitude of the private-sector funds each VC firm managed. Third, all investment decisions regarding which companies the VC firms should fund must be left exclusively to the general partners of the VC firms.

    While this concept was subsequently advocated by columnists in The New York Times, The Washington Post, and The Wall Street Journal, it was not warmly received by U.S. government leaders. One member of Congress explained that, for political reasons, legislators would feel obliged to direct funds to particular investments, which in all likelihood, would lose money, thereby embarrassing themselves.

    There were adherents, however, and last year, the state of Florida and the U.K. government created such funds for investing in VC firms. Moreover, in December 2009, a World Economic Forum study that analyzed over 28,000 companies in 128 nations that received VC funding between 2000 and 2008 found that companies that received up to 50% of their VC from government funds outperformed companies that were backed either entirely by private funds or mostly by government funds.

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