Let's Cut Out the Banks and Finance American Innovation

By Sander Hicks, AlterNet. Posted December 12, 2008.

Commercial venture capital is a form of finance unique to the USA. A venture capital firm takes a piece of ownership in a new and growing firm and looks forward to when that company's growth provides an opportunity to "exit" in about five years. When the investors exit, they sell their stake for usually 5 to 20 times what they paid for it. It's a great deal, but only around 1 in 3 investments grows to that point. So a venture capital firm is ready to write off losses on most of its investments. Experimentation and risk are built into the system.

The exit, though, is a triumphant experience for the founders, the original shareholders and the VC firm. Often, the exit takes the form of the company getting acquired by a bigger firm, or, even better, the company goes public by selling shares on a public stock exchange. This represents a triumph of economic democracy: the people have supported the products or services of a particular firm by choosing to spend their money with that firm. The original entrepreneurs sacrificed for years to get the firm going. The big payoff is the explosive growth in the value of their shares at the moment of the public offering.

Here's a real-world example: I met this guy, Bob Nape, who runs a solar panel company in Ithaca, N.Y. He's been established for a good couple of years, but he really wants to grow. Let's say he goes to USSVA with a good business plan. USSVA could choose to invest $2 million in Nape's company and own 45 percent of it. With that $2 million, in five years Nape's company will grow. He would hire more people, and he would buy more goods and services for his company. The local economy in Ithaca will feel the love.

After all, alternative energy is bound to be a hot stock in the Obama era. Nape's firm is a sound investment in light of increasing demand. In five years, there could be an exit, at which time 45 percent of Nape's company would be worth much more than the investment USSVA put in. There could be a public offering. USSVA (i.e. the U.S. government) would get back something like $5 million to $10 million for the $2 million it put in. Then, USSVA would have more money to invest in the next round of companies in Ithaca.

USSVA could eventually be a self-sustaining government entity. In time, it won't even need an annual budget from Congress. It's time for government to use the power of the markets. USSVA would be an incubator for thousands of new companies producing things that people need. It might save the planet. It would help people feel good about doing meaningful work, saving their country, realizing a larger purpose.

This Is the Ultimate Way to Say No to Bailouts

This is not a top-down infusion of cash into the financial sector. I'm interested in figuring out how we can unite workers and entrepreneurs to transform this global economy and get everyone back to work. And, why not go beyond that? Let's think of everyone not just working but also building a better world.

So, rather than another $700 billion for the banks, or tens of billions for the Big Three carmakers, let the market run its course. These firms made their choices. Now they have to live with them. The banks chose to lobby President Bill Clinton for the repeal of the 1933 Glass-Steagall Act. Then they engaged in that unhealthy mix of commercial and investment banking, which led to the subprime mortgage crisis, which led to the credit markets shriveling up, which led to this recession. In Detroit, the Big Three helped kill the electric car; they've resisted fuel-efficiency and ignored a changing world. Now they want a blank check? Their SUVs heated up our planet. Congress was right to rebuff them. But how do we create their replacements? The USSVA.

But there will be some resistance to these ideas, surely.

See more stories tagged with: financial crisis, microfinance

Sander Hicks runs the Vox Pop/DKMC media machine and coffeehouse. He is publisher at the New York Megaphone newspaper, and author of The Big Wedding: 9/11, The Whistle-Blowers and the Cover-Up. He lives in Brooklyn.

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