Editorial: The venture capital idea is too risky for Mississippi
The Mississippi legislature should resist the siren song of the state’s economic development agency, which is seeking approval to create a venture capital fund.
“What could go wrong?” asked Mississippi Today columnist Geoff Pender. “Well, if history is any guide – a lot. The last time the state tried this, millions of dollars were misspent and stolen, no new businesses started, someone went prison and the state spent years trying to sort out what was wrong.
The money is said to come from the US federal Rescue Plan Act, which sends $10 billion to states so they can set up small business credit programs.
Mississippi’s share is $52 million, and the Mississippi Development Authority wants to use it to create a private, nonprofit organization that would work with full-time venture capitalists to invest in private companies.
As Pender pointed out, the state has gone down this road before, with dismal results.
In 1994, at the behest of state economic developers, the Legislature borrowed $20 million to create the Magnolia Venture Capital Corp. The idea was the same as today: invest in small businesses with a chance of success and reap huge profits as they grow.
This is the same reason why many people buy publicly traded stocks or mutual funds. But Magnolia Venture Capital involved taxpayers’ money, and the venture turned out to be all risk with no reward.
Pender’s column said the nonprofit spent $4.5 million on questionable overhead. Its CEO, later convicted of fraud and embezzlement, paid himself nearly $750,000, and companies he owned or was affiliated with received nearly $1.2 million of the cash. of the fund.
Equally serious, the fund did not help a single small business get started. She only made one investment and the state had to repay the entire loan plus interest. The fund was a complete failure.
You know the old adage: Those who forget the past are doomed to repeat it. It seems some people in Jackson haven’t heard it yet.
This year, two bills on the new venture capital fund advanced, one in the House, the other in the Senate. The MDA’s acting director said things were different today and federal money would come under much more scrutiny.
But the big question is why should taxpayers’ money be used for high-risk investments? High risk means exactly what it says – there is a high risk that the investor will lose.
The Legislature would be much more prudent to create a non-profit, PERS-style, professionally managed investment fund that invests money in publicly traded companies. The yield would be maybe 4% to 8% per year, which if left alone for a few years would increase nicely. And there would be almost no risk of losing everything.
This shoot-for-the-moon venture capital stuff is off limits, and thankfully a Senate committee removed that language from its bill. MDA’s push to help Mississippi-based startups is understandable. But this is not the job of the state. Leave this high-stakes poker game to private investors.
—Jack Ryan, McComb Enterprise-Journal