If a venture capitalist ran America
May 5, 2012
The inevitable Republican presidential nominee, Mitt Romney, has an impressive record as a venture capitalist and is running neck and neck with President Obama in most polls. With Mr. Romney having a credible chance of becoming the next president of the United States it might be interesting to consider how experience as a successful venture capitalist might be applicable to running America.
Before trying to answer that question it is probably important to define what a venture capitalist is and does. Although one size doesn’t fit all, here is my perception of venture capitalism. The goal of a venture capitalist is to find existing businesses or start-ups and provide funding to them in return for a share of the business or a high return on their investment. Because their only objective is to make money there is no incentive to consider businesses that are not profitable. There is also no incentive to create jobs and in fact it is not uncommon that jobs are cut in order to increase profitability. There is no long term commitment to the business and there is no requirement to be passionate about what the business is actually providing to its customers. Passion may exist but only in connecting investors with profit returning companies.
A successful venture capitalist must be able to promote the virtues of many potential investments even though they may be at odds with each other. One day a venture capitalist may be passionately promoting the merits of a high tech company to potential investors and the next day they may turn their investment passion to an organic milk producer. Unlike a person who has started their own business because they believed in its product or service, for a venture capitalist, having any core convictions or passion about the business itself is discretionary and would only be an encumbrance to closing the deal. If venture capitalist has any core belief it is that for every investment there must be a return on that investment that is greater than the original investment. Final dollars should always be greater than initial dollars, e.g. $(f) > $(i).
For a venture capitalist, the business is defined on spreadsheets and financial statements. There is no emotional commitment to the business – it is not personal. As long as a venture capitalist can invest other people’s money and provide a handsome return on their investment they are considered successful. What happens in between those two events is superfluous. It’s the bottom line that matters. A venture capitalist realizes that a significant number of investments may be unsuccessful and that the investor will lose their investment and the business owner will lose their business. To a venture capitalist that is simply the way the business works.
Is a success as a venture capitalist synonymous with a success as a business creator? Probably not. There is certainly nothing wrong with people making a return on their investments and it is true that the funding provided by venture capitalist can fuel the engine of business creation, but to actually call a venture capitalist a business creator is where things become a bit murky.
To say that venture capitalist are business creators does a disservice to all the small and medium businesses out there that were started and are being run by people who have a fundamental passion about the business. They are the ones who stick with their businesses when the balance sheet says to stop. They are the ones who believe so much in what they are doing that they mortgage their homes to make payroll. For them business is more than providing a return on an impassionate investment. They are the ones that have made America what it is today and what it will be in the future. America would survive without venture capitalist but it would most assuredly perish without the businesses created by passionate and dedicated businessmen and businesswomen.
Even if they lack passion about a business in which they invest there is no denying that successful venture capitalist are skilled businessmen and generate impressive wealth for themselves and their investor clients. But how well would those skills be suited to running the United States government? To what degree and in what areas would the skills of a venture capitalist be transferable to tasks in running America?
A venture capitalist running America is not the same concept as running America like a business. As we know venture capitalist are not required to be skilled at running businesses in which they invest. It’s not what they do. They don’t get their hands dirty in the mundane but essential tasks of hiring, firing, making payroll, inventing new procedures, new processes or exploring new markets. A venture capitalist’s purpose is to provide the money so that the true business creator can accomplish those tasks.
Having established the general role of a venture capitalist in business development, how would their philosophies and skills in raising venture capital and investing in businesses be applied to running a government? Would a venture capitalist attempt to run America like a business? Hopefully not. “Run America like a business” is a popular phrase but one that has been shown to be without merit as an actual solution to any government issues. Business and governments are fundamentally different entities and running one like the other is folly and fodder for political campaign pandering. See the reading list below for articles on running America like a business.
A venture capitalist would take a different approach to running America. They wouldn’t try to run America like a traditional business since we’ve already established that they have no special skills in that area. What they do have are skills as venture capitalist so the question is what would it look like if venture capitalist skills and abilities were applied to running the US government?
The first task for a venture capitalist president would be to identify his two primary stakeholders. Who is the investor and who is the entrepreneur needing an influx of capital. It gets tricky out of the gate. In a government there are two investors. One group is the holders of US Government bonds whether that is the new born with his first savings bond or foreign governments holding large amounts of US debt. The second group of interest to the venture capitalist president is his campaign donors. They have invested in getting him or her elected and as any venture capitalist knows there money is always invested for a purpose. A venture capitalist president understands that money isn’t invested for altruistic purposes it is invested to generate a return on the investment. It would be naive to think that a president Romney wouldn’t fully understand more that most that Citizen’s United and the Koch brothers expect a return on their substantial investment they made in him.
Remembering the venture capitalist core principle, $(f) > $(i), A venture capitalist president would immediately begin evaluating which government programs were profitable and which ones were operating at a loss. This may be a futile and frustrating exercise for the venture capitalist president since by its very design no government entity is intended to be profitable. Remember that a fundamental difference between businesses and governments is that businesses are created to make a profit and governments are created to provide services funded by taxes that can be raised and lowered as needed. Businesses make money by selling something; governments get money through taxes. How does a venture capitalist adapt to that inversion of the core principle of venture capitalist? With angst and ineptitude I would suspect.
I also suspect the oval office discussions about to achieve national profitability would be rather animated. The only way to achieve profitability for the country would be to immediately raise taxes, equivalent to a private business increasing sales, and to trim costs by eliminating government programs that were losing the most money. The later would be especially challenging since by their very nature, ALL government programs are supposed to lose money –it’s why they exist. Nothing in a venture capitalist experience or mind set would have prepared them for making decisions where $(f) > $(i) was not the core objective. They would be starting with less than a blank slate and would need to unlearn all the principles they used successfully in the venture capitalist world because they would have no relevance in running a government.
A venture capitalist president might settle on privatization as a way to improve America’s balance sheet. Maybe all the roads could be sold to third party operators who could turn them into toll roads. That would allow the elimination of local government road maintenance operations saving the tax payers money – at least on paper. Drivers would still pay the same and probably more to drive on the roads. Toll booths are expensive. I suppose we could also privatize the biggest budgetary item – the military. We’re already taking a step in that direction by using contractors in Afghanistan and Iraq. Maybe that’s the first step. But how would a private military sustain itself financially. Would the US make payments to it? What if we fell behind? Hello Junta. I don’t like where this privatization thing could head.
Could a venture capitalist run the country? Possibly, but it would be a Procrustean fit at best – trying to convert programs designed to show declining balances into profitable entities. Eventually it would become obvious that the government isn’t a business and applying venture capital methods to government operations is folly.
Maybe the government should be run like a government. Maybe a business should be run like a business and maybe Venture Capitalists should invest other people’s money in businesses that they think will generate a profit in the shortest time possible. Capitalism works best when these three entities remain separate and interact appropriately.
Sources on why “Running the government like a business” is a silly idea.