What The Government Should Do With $1 Billion

Don Dodge totally nails it in his post Create 50,000 companies for $1BHe builds on Fred Wilson’s No Thanks post when discussing what the US government should do with 1/20th of auto industry bailout money. 

“Government should create incentives for investment.  It is probably best not to make the investments directly. There are already some good programs and incentives in place that have been forgotten or underfunded for too long. Pouring money into these programs is certain to stimulate investment, inspire innovation, and create jobs.”

The four existing programs that Don reminds us of are the Small Business Investment Company, Small Business Innovation Research, 20% R&D tax credit, and a Seed Capital Tax Credit.

I’m personally a huge fan of the Seed Capital Tax Credit, especially administered at the state level.

Note the key phrase “incentives for investment.”  And Don correctly makes the assertion that “it is probably best not to make the investments directly.”

Ironically, none of this is very difficult to execute on and it would have an enormous impact on innovation, investment, and entrepreneurial job creation.  If anyone in the government wants to talk about it, just email me.  I’m happy to head up a committee of three which would include me, Fred Wilson, and Don Dodge.

  • I really like this idea – image if we had a 100 car makers not just 3? None of them would be too big to fail. They would each have to innovate more and provide better products for customers just to compete with each other. Or, a 1,000 investment banks or 10,000 insurance companies. If one, two, or more fail – it would not effect the entire economy.

    Might not be good for VCs or investors as no one company would provide huge return possibilities.

  • The Seed Capital Tax Credit looks pretty similar to what they're currently proposing in Colorado, which is the Colorado Innovation Investment Tax Credit. http://cohousedems.typepad.com/my_weblog/2009/02/

    • John Ives

      I wonder if reducing the holding period for Colorado Source Capital Gain Subtraction (Reg 39-22-518) from five to one, two or zero years might be more efficient.

  • The seed tax credit is a fascinating stimulant, I like it a lot. Curious about you comment "especially administered at the state level". Why?

    • Since most angel investment is locally focused, it’s a lot easier to tie the outcome of tax credit to economic development if it’s administered at a state level.  There’s no reason the tax credit can’t be a federal credit, but I think state level programs, especially those that are simple and streamlined can work really well.

  • Got it/makes sense. So, can you please get this in place in the next quarter? I'm probably hitting the seed cap market this Summer 😉

  • I agree with Don's post. The SBIR program is very important especially in Biotech. Unfortunately the new stimulus plan specifically excluded the SBIR program from the increase in research funds for the NIH.

  • this makes great sense… funding startups is the best way to create jobs… i wonder if illinois has anything like the seed capital investment for individual investors… need to look into this…

  • Sean


    I'm interested in your thoughts on changing the accredited investor limits. I've heard rumor that they are actually going to increase the requirements but I think lowering them would actually be the right move.



    • I’ve never really understood the current limits – they are too complex and restrictive.  So – yes – I’d vote for lowering the requirements.

  • Time to rain on the parade. Due to high failure rates, 47-48 start-ups begun over the course of a decade yield just one entity employing ten people. So under Don Dodge's premise, we would end up with about ten thousand new jobs over the course of ten years for our $1 billion. Given those odds, pouring $1 billion into "start-ups," writ large, does not seem like a very good ROI.

    A better idea might be putting a billion into THE RIGHT start-ups. Dodge alludes to this idea by virtue of the programs he references. But it's important to realize that start-ups, in and of themselves, include a lot of shitty little businsesses (SLBs) that don't produce any long-term value.

  • John, I don’t know this regulation very well.  Can you give me a little more detail on it (so I don’t have to read it?)

    • John ives

      Disclaimer: John is not a tax accountant or attorney. Please contact your tax adviser for more specific information 🙂

      Here's the general rule: For tax years beginning on or after January 1, 1999, qualified taxpayers can subtract from the federal taxable income reported on their Colorado income tax return qualifying net capital gains on assets acquired on or after May 9, 1994 and held for at least five years.

      Qualifying attributes:
      1. Some special treatment for "Installment Sales"
      2. "Pass-through" entities generally qualify
      3. Hold interest for at least 5 years
      4. Entity must have >50% of its "property" and >50% of payroll assigned to locations in CO.
      5. No carry forward.

      Understanding the net impact to an individual's (i.e. an angel's) tax situation might also depend on the federal small company cap gains tax treatment.

      • Actually, I think the five year holding period is reasonable.  This forces it to be a real investment gain vs. a speculative gain.

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  • hey, no fair appointing me to a committee when i was not looking!

    • Hah!  I guess I need to nominate you and – given that most committees are useless – you’ll decline!

    • Hah!  I guess I need to nominate you and – given that most committees are useless – you’ll decline!

  • John Ives

    I think the five year holding period is reasonable too. But a problem is that an acquisition by an out-of-state entity within the five year holding period will disqualify the gain. If the State could fix this aspect and increase the Subtraction so the net (Fed + CO) capital gains tax is near zero, then I'd take this approach over the distorting effects of a tax-payer sponsored investment on the front end (HB 1105). It is strange that CO HB 1105 does not have a holding period.

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  • Sara

    I think the post above made some interesting points, on a related side note I found a used version ofTax Research which is directly related to this topic for lessthan the bookstores at http://www.belabooks.com/books/9780136015314.htm

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