The Bailout: An Entrepreneur's Perspective

I use this space about once or twice a year to talk about political issues.  Honestly, I try to avoid it as much as possible but it's impossible to separate economic policy and entrepreneurship.  If you read anything from Paul Graham, you'll notice how he intricately threads these issues together time and time again.

If you've ever read my Twitter stream, it's not hard to guess what I think of the Bailout/Stimulus Bill signed into law recently.  In short:

I think the "Stimulus" is irresponsible, illogical, and a threat to the economic liberty and risks that entrepreneurs require.

While I'd love to write a whole treatise on this, I'll keep it to three points:

First, the "Stimulus" is supporting failed businesses and failed business models.  Don't get me wrong, in technology circles, we've seen literally hundreds of both that have gotten round after round of funding.  But at some point they're allowed to fail.  For example, even before we were into the current depth of the recession, GM's burn rate was well over 4.2B (billion!) per quarter. While the reason could include anything from union contracts to the "credit crunch" to a failure to deliver a desired product to high gas prices, this is not a success by any measure.  Of course, the scary part is that all of those things were known risks in advance… and yet they have been unable to successfully respond to market conditions.

While I'm picking on GM, this could be applied to numerous companies in a variety of industries… when the government funds something, it effectively incentivizes it.  This causes problems where politically-connectedness could end up being a new form of currency, but it also sends the wrong signals to those involved.

Second – and more importantly – the "Stimulus" unnecessarily ties up resources.  When the management of a company fails, their resources – people, capital, office space, equipment, etc – are generally released back to the market.  Other companies buy the useful equipment, rent/buy the space, use the capital, and hire the people.  Sometimes this happens immediately and sometimes it takes some time.  While it can be painful, it provides a way to get those things into the hands of people who can use them effectively.  As it stands now, we're mocking the executives who have lost billions… as we cut them another check for billions with a message of  "be good this time!" 

We'll never have any idea how many great ideas were lost as a result.  A few years ago, some friends were with a startup that was slowly failing and couldn't even reliably make payroll.  Unfortunately, by the time the situation reached this point, the friends had to get jobs.  Their reserves were gone, their patience were gone, and their stress was high.  In the years since that startup has failed, not one of them has joined another, they don't have the risk tolerance anymore.

Finally, a government entity inserting itself into the capital/ownership structure of a company is dangerous.  As we've seen with the Troubled Assets Relief Program (TARP), it is possible for the government to give money under their terms and add rules as the political climate changes without input or conset from the company.

Honestly, would you sign a lease on the smallest, cheapest apartment if the landlord could change their side of the lease at any time without your consent?

What does that do to your other investors and shareholders?  How can you – or anyone else – properly evalute the risk and value of your organization?  How can you – as a legal officer of the company – perform your duty to protect the assets and resources under your control?


Without getting into any of the underlying political principles or even specific funding priorities, this plan looks like trouble.  Just as we saw the Sarbanes-Oxley Act – designed to prevent accounting scandals like Enron – change the prefered exit strategy from IPO to "being bought out by Google", we haven't seen or even guessed what the implications and fallout of this are going to be… but we're going to be dealing with it for years to come.