The main problem with the implementation of any sort of entrepreneurial blitzkrieg to reboot the flagging U.S. economy is that entrepreneurial ventures are inherently risky and investors are inherently risk-averse. How then do we convince investors en masse to pour hundreds of billions of dollars into new business ventures in a sluggish economy? How do we make the case that such an investment avalanche will generate their required rate of return? How do we expedite the process so that a sufficient number of new ventures will be created in a timely fashion to generate the necessary drop in unemployment and return the nation to robust economic growth?
Herewith, the introduction of the Venture-Backed Security (VBS), a financial instrument designed to instigate and propel a tsunami of rapid, efficient, and profitable entrepreneurial investment.
In a manner analogous to the mortgage-backed security (which I consider to be financial industry nitroglycerin), the VBS would serve the purpose of introducing mass-scale liquidity to the arena of entrepreneurial ventures. At present, business creation supported by venture capitalists, angel investors, personal sources of debt (credit cards, home equity loans, etc), and other mechanisms is failing to provide enough jobs for the nearly 8 percent of the population officially seeking employment (and the countless millions either underemployed, reluctantly working part-time, or having dropped out of the workforce altogether).
We need to create a mechanism to accelerate this business/job creation process. To do so, it seems that we must tap into the profit motive of Wall Street. If we create a mechanism that rewards (financially) the big investment banks and other securities traders as part of the creation of new entrepreneurial ventures, we will have a self-sustaining high-speed vehicle that produces new businesses and new jobs for the American economy. Because Wall Street seems to love confusing and convoluted financial mechanisms (e.g., mortgage-backed securities, derivatives, collateralized debt obligations, credit default swaps, et al), the venture-backed security should be well received by the financial world. [It seems that the more confusing the “financial instrument” the greater the opportunities to profit from it.]
Entrepreneurial risk reduction/diversification would be accomplished by creating a pool of investment dollars from a (large) group of investors into one Entrepreneurial Venture Investment Fund (EVIF), a type of turbo-charged venture capital investment pool, and bundling together entrepreneurial investment opportunities (i.e., new business ventures) into groups of 30 or more (an amount that is appealing from a statistical standpoint), which we will designate as an Entrepreneurial Venture Investment Bundle (EVIB). No individual investor is solely at risk in any individual new business. The Fund invests collectively in shares of the Bundle.
Each business in the Bundle is thoroughly vetted and determined to be a viable new business enterprise. Data from the Small Business Administration (and others) suggest that 70 percent of new businesses survive at least two years, and about 50 percent survive five years, with little variation in survival rates across different industries. These survival numbers are even better when the businesses receive various forms of support (e.g., mentoring, participation in business incubators, etc). By providing such business support to each member of the bundle, we could improve the financial attractiveness of the entire bundle, i.e. increase the return-on-investment of each bundle. Mathematical analysis and calculation in conjunction with the survival rate probabilities would be utilized to determine an average return on investment for the Investment Bundle. The calculated ROI then would be the basis for all investments and transactions related to the Investment Fund and Investment Bundle.
Furthermore, in order to replenish the supply of investment dollars in the EVIF, the EVIB would be sold upstream to Wall Street (e.g. investment banks, et al) for the purpose of being securitized into the venture-backed security. As each 30-venture bundle is packaged and sold, the EVIF would take the money from the sale of the bundle and pour it into new 30-venture bundles, and the process would repeat. If successful, many different flavors of EVIFs likely would be created (by others trying to get into this game) supplying a growing number of EVIBs with investment funding. The net result of the VBS process is a private-sector acceleration of job creation, in effect an entrepreneurial blitzkrieg, via the mechanism of moving money from Wall Street directly into new business ventures. [And, because the government seems always to be “a day late and a dollar short” (or generally clueless) when it comes to regulating the financial industry, the VBS “era” will be long underway before federal regulators even begin to figure it out.]
To satisfy the needs of Wall Street, the newly created security (= VBS) would be sold on the bond market to an array of investors who habituate that milieu. [Indeed, some variation on the collateralized mortgage obligation or collateralized debt obligation could be used here, if necessary, to create a collateralized venture obligation (CVO), with various investment tranches to create some degree of certainty about time-to-maturity (etc) for the new bonds and to satisfy the needs of Wall Street and the investment community.] As the EVIB generates a return, this money would be passed through to the VBS investors. The financial industry would profit via the fees and commissions that generally accompany bond trading. [One obvious hiccup here is rating the VBS bonds. How would the ratings agencies view them? Would the new bonds receive the coveted triple-A rating based on the underlying statistical probabilities associated with the investment bundles? Or, would they fall into the “junk bond” category and be rendered untouchable by the majority of traders/investors? Or, would the VBS benefit from its uniqueness and newness and quickly become the new “game” in town?]
This rather convoluted VBS-based mechanism would lead directly to job creation via the development of new business ventures, supplied by a replenishing pool of investment dollars, a consequence of the entrepreneurial venture securitization process. The massive job creation would help to fuel an economic rebound in the U.S. economy, leading ultimately to long-term (GDP) growth and full employment. [Full employment helps to reduce the “drag” on the government treasury by providing economic autonomy to all those folks currently receiving various forms of public assistance (unemployment payments, food stamps, various tax credits, etc), which ultimately would make it easier to reduce the federal deficit and balance the budget.]
Clearly, if this mechanism is viable, there is plenty of money to be made by everyone associated with it. [Although the real goal is to provide employment to the masses currently un- or under-employed, I recognize the need to build in a profit motive to provide the necessary incentive for the folks who control the money.] The upper limit is achieved when the country has returned to full employment, a situation where the number of businesses (jobs/incomes) is balanced with the available workforce and demand for the output (goods/services) of those businesses. With sufficient entrepreneurial dollars flowing through the economy (a consequence of the job creation associated with each new business venture), the overall economic climate will become self-sustaining (and provide even greater opportunities for business growth and development).
I am aware that various aspects of the above-described process might already exist in one form or another (e.g. investment pools), but I don’t know if the whole mechanism has ever been attempted (especially on the scale suggested above). It is clear as well that there would be all sorts of details that would have to be sorted out and that a public relations putsch (concentrated in the investment community) would be required to “sell” the concept. However, we are in the midst of a long-term economic slowdown, with a slow painful “recovery” stretching deep into the foreseeable future. Even though 92 percent of the (official statistical) workforce is employed, the economy is not creating many good-paying jobs, people continue to lose their homes, GDP is growing very slowly, and projections indicate years of such economic sluggishness. I consider this to be a national emergency and I believe radical steps are required to remedy the situation. If the venture-backed security (VBS) serves as impetus to massive job creation and to the critical goal of jump-starting the flagging U.S. economy, then it is worth pursuing despite any and all obstacles.