Government as Venture Capitalist

Since the Obama administration wants to act like venture capitalist I wanted to learn more about these venture capitalists. So, I did a little research on the subject.

First, what is a venture capitalist? Investopedia.com defines a venture capitalist (VC) as “an investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to public funding.” The entry continues by saying “venture capitalists usually expect higher [my emphasis] returns for the additional risks [my emphasis] taken.” In other words a VC is not investing in the company so much to help the company but to make money themselves. Otherwise they wouldn’t be risking their own money. When gov’t invests in a company it’s different. Gov’t isn’t in the business to make a profit. They invest in a company to create jobs. And since Washington can print money there is not much risk for them to invest in a company like Solyndra. Whatever they lose they can make up by raising taxes.

When you are investing in a startup or small company who wishes to expand there’s a risk involved. With a established small company there is fewer risks than with a startup. That’s just basic reasoning. A smart VC looks at the management of the company. He or she wants to know if the management can run a business that generates high return for its investors. The VC also wants a list of experienced, qualified people who will play central roles in the company's development. As the article where I got this info says: “they [the VCs] prefer to invest in a bad idea led by accomplished management than a great business plan supported by a team of inexperienced managers.”

Also, a VC wants a market size that is $1 billion or more in revenues. Because of this VCs want a detailed market size analysis as part of the company’s business plan.

Thirdly, VCs want a company that produces a great product and can compete with other businesses similar to themselves. They look for a company that solves a problem that no-one else has solved in the market place. They look for a company that can make product or do a service that no-one can do without. And if they find a business that is a near monopoly all the better.

Finally, the VC has to be aware of any risks the company has. Like for example:

• Could regulatory or legal issues pop up?
• Is this the right product for today or 10 years from today? 
• Is there enough money in the fund to fully meet the opportunity?
• Is there an eventual exit from the investment and a chance to see a return?

Keep in mind it is the VC’s money he is investing. He doesn’t want to make reckless investment and lose it all.

If you ever watch the reality show Shark Tank all five of those “sharks” on the show are VCs. Just about everything I described above, the sharks ask about people coming to them for money they want for their business. What’s funny is that most entrepreneurs on the show ask for a lot of money from the sharks but at a low rate of return. The sharks almost always tell these people you are not giving me enough return for the risk involved. What’s the moral of the story? The sharks just want to make money. Period. It’s that simple.

The reason the Obama administration make lousy VCs is because they have no business experience. They don’t even have a business mind-set and never will get one. Everything I described above they probably think is mean, cruel, and exploitive. Making money just for the sake of making money. That’s just plain greed to them. And the VCs are taking advantage of the small business owner.

Like I said, since the money the gov’t is risking  isn’t really their own and they can always get more from taxes do you think they are going to research a company and ask the right questions? Why should they when there is no incentive for them to do that. And if they think investing in a business so it can create jobs is a noble deed whether or not the business is prosperous or not just compounds the problems. Yes, a business hiring people is great. But if it goes out of business (and fires everyone) because of bad management or just not enough customers then that is worse. So much about being noble. 

One last note. In his blog The Venture Capitalist Aptitude Test, Guy Kawasaki describes a test that a wannabe VC can take to see if he can succeed as a VC. First, if you have work background in engineering and/or sales that’s a plus. Obama doesn’t. If you are in managing consulting, or are a investment banker, an account or have an MBA that counts against you. Well, Obama thinks he is an investment banker. Or is at least acting like one. The author explains more in his blog about why having a background in engineering and sales is a good thing to have. Basically, you have to know about what you are investing in. Also, remember this: The two occupations most important to any business is engineering and marketing. That is, for a business to succeed it has to make a product (or a service) and sell it. Otherwise, the business fails. 

Then the author goes into first-hand experiences like “worked at a failed startup, so that you understand three things: first, how hard it is to achieve success; second, that the world doesn’t owe you a thing; and third, what it’s like to be fired or laid off.”

Finally, he talks about having necessary knowledge about a business to be a successful VC.

If you could sum up this interesting article it would be this: Know your product or service you want to invest in and know how a successful business works. If you don’t have either knowledge then you better think twice about being a venture capitalist.