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If Startups Are Like Carrier

Friday, December 2, 2016 5:23
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Most of the research money for startups that comes out of government coffers finds its way to Silicon Valley.  There is an entire ecosystem that survives on defense research dollars.  There are two versions of how Silicon Valley got built.  One is a bunch of enterprising people built a lot of cool stuff.  The other is the government gave people a lot of money to build stuff for the defense industry.  I am not going to say whether it’s a good thing or bad thing, it just is.  Personally, I want to see far less government spending and involvement.  I believe in free markets, and they allocate capital better.

A lot of people are pretty happy about what they interpret as dual victories for President-elect Trump.  He persuaded Ford to stay in Kentucky, and persuaded Carrier to stay in Indiana.  I agree with economist Brian Wesbury.  No matter what you think about it, any spending by the government in the form of actual spending or a tax decrease means that it comes from other taxpayers.  Governments do not create money out of thin air.  Governments cannot “invest”.  It’s either a tax on current earnings, or a tax on future earnings in the form of debt.  There is no free lunch.

I am also very wary of a President getting involved in single company decisions.  I didn’t like it when President Obama did it, and I am not going to like it when anyone else does it regardless of political party.  Presidents are there to set policy and directional course.  They cannot micromanage otherwise they will fail for sure.  It becomes a slippery slope to government involvement and crony capitalism.  It can also be interpreted as fascism.

That brings me to startups.

I wonder about the research dollars that find their way to startups.  Will there be a change here?  What if a Trump administration shifts where the research dollars go? Will the government shift the money that traditionally flows to Silicon Valley to other areas of the country?

One thing for sure, many of the manufacturing jobs that left the US are not coming back.   That doesn’t mean new things can’t be built.  It’s not zero sum. With big decreases in corporate taxes and regulation, the internal hurdle rates imputed for projects will drop.  Corporations should make radically different decisions on what to invest in, and where to invest.   Corporations are also going to start to buy innovation rather than try to build it in house.  They have healthy balance sheets.

Assume that Trump shifted research dollars to revitalize the Rust Belt.  Where would they be most productive?  Nothing against Paducah, Kentucky, but if you dropped a bunch of research dollars there the money would go to waste for sure.  However, there are other Rust Belt cities that have a lot of potential.

For the past several years, people like Brad Feld and Steve Case have talked about startup ecosystems and the rise of the tech industry in the greater US.  However, it’s extremely hard to get money to flow into those places.  I have spoken to entrepreneurs in Detroit, Madison, Milwaukie, Minneapolis, Pittsburgh, Cleveland, Columbus, Indianapolis, Chattanooga, New Orleans, St. Louis, Omaha and Chicago.  It’s tough to raise capital and get off the ground.  Platforms like Angel List are supposed to make it easier but in practice it isn’t.  They are all Silicon Valley centric.  What if Trump channeled research dollars into towns that had a research university and burgeoning startup ecosystem?  What if we changed public policy to make it very advantageous to start a company there?

The political cynic in me says Trump would be willing to think about this because he’d like to enlarge his piercing of the “blue wall”.  Doing things for political reasons is the wrong move.  But, the investor in me knows there are some really great ideas and companies that are in those places and they struggle to get capital.

This is super tricky because any government dollar that is spent automatically comes out of the pocket of the taxpayer.  Government “investing” in a company means it’s picking a winner or loser.  See Solyndra.  Maybe the government should figure out a way to establish different goals it needs funded; like pro-choice education for example.  It could block grant capital to various cities that gets distributed into companies attacking that problem.

That doesn’t avoid local politics unless they come up with a new distribution mechanism.  For example, in Illinois, it might run through Michael Madigan or someone tied to him.  Therefore anyone that was on the opposite aisle would be frozen out.

The most efficient way to achieve the goal might be to cut the spending budget entirely and offer tax credits to anyone or any company that invested in the goal.  That way if someone decides to undertake the effort of innovation, they get a carrot to do it.  The market will let the best ideas rise to the top, and kill off the ones that aren’t that great.


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