Venture Capitalism not Crony Capitalism

Venture capitalism is, and always has been, the heart of capitalism. There is nothing "new" or modern about it.1 Venture capitalism is one or more private investors financing a risky new venture (thus, the "venture" in venture capitalism) -- or a private investor's attempt to salvage an already existing, but troubled, business. Venture capitalism takes the risks that banks won't and that governments shouldn't. Crony capitalism is the system of politically motivated handouts from the government disguised as bailouts or "investments."

America was created by venture capitalists like Thomas Denham and Hugh Meredith. Both men worked as partners with Benjamin Franklin. Denham and Meredith made investments that allowed Franklin to pursue a career in publishing.2

The rumblings of revolution can be traced to Franklin's failed effort to be on the receiving end of a crony capitalist handout. When Pennsylvania's Lieutenant Governor (for the British Crown) Sir William Keith reneged on his promise to help secure financing for some printing equipment, he pushed the young Ben Franklin to seek private partners and investors -- and soured Franklin on British rule.

Keith had pledged letters of credit to pay for printing hardware in London. Under the impression that financing for his new enterprise had been secured, a teenage Franklin sailed to England. But there were no printing presses and no letters of credit waiting for Franklin when he arrived. A penniless Franklin found himself stranded far from home.  Denham, a well-established Quaker merchant from Pennsylvania, befriended the young Franklin. Denham had met Franklin during the initial voyage. Although it was not a huge investment, in 1726 Denham paid Franklin's £10 return passage to America.3 A wiser Ben went to work in a new store Denham had opened in Philadelphia.

The moral difference between a Governor Keith and a Thomas Denham is staggering. Keith made lavish promises (not just to Franklin) based on the use of money that Keith did not have or that did not belong to him. People were seduced into Keith's "investments" because of his position in the British government. Spending someone else's money is easy, painless, and risk free -- for both the "lender" and the recipient. Franklin described Governor Keith thus, "He wished to please everybody, and, having little to give, he gave expectations."

Denham, on the other hand, could not afford to tarnish his reputation by making promises he could not keep. Like many entrepreneurs, Denham was a venture capitalist and a retail businessman. He loaned and borrowed real money to and from real people. Franklin admired Denham:

There, by a close application to business as a merchant, he [Denham]acquired a plentiful fortune in a few years. Returning to England in the ship with me, he invited his old creditors to an entertainment, at which he thanked them for the easy composition they had favored him with, and, when they expected nothing but the treat, every man at the first remove found under his plate an order on a banker for the full amount of the unpaid remainder with interest.

A few years later, Franklin's first business was funded by another venture capitalist. Franklin set up a printing shop in Philadelphia in a partnership with Hugh Meredith. Meredith's father loaned his son and Franklin £ 200 to start the business.4 That's how risky businesses are started -- with venture capital.

Mark Twain was a venture capitalist. A lousy one. He poured the money he made from writing into investments in the leading edge technologies of his day. And he lost every penny. Standard Oil's Henry Rogers, holding Twain's copyrights as collateral, rescued America's greatest writer from bankruptcy.

Twain was friends with Nikola Tesla. Tesla was involved in a heartbreaking episode of venture capitalism. Outside investors supported, and then pulled the financial plug on, Tesla Electric Light & Manufacturing. Nikola Tesla was sent packing, from his own company, to George Westinghouse -- even though Tesla had invented the polyphase technology that would become the backbone of electric (AC) motors and the basis of the power grid that now lights our planet. In a fair world, Tesla would have been the wealthiest man in it.

And so the story of venture capitalism goes -- or used to. This is not a fair world. Whether it is unfair to the entrepreneur who seeks (and needs) the investment -- or unfair to the investor -- is mostly a matter of hindsight. Markets, like human beings, can be fickle. Denham could have lost his £10 investment had Franklin died on the voyage home. Papa Meredith's loan might have disappeared into thin air had Franklin not been the clever editor and writer that he was. (Hugh Meredith, the son and Franklin's business partner, was a notorious alcoholic.) Tesla might have been a billionaire had he not ripped up a contract offered to him by Westinghouse.

Venture capitalism is based on choice and freedom. No one forced Denham to pay for Franklin's passage. The investors, who voluntarily pulled their money from Tesla Electric, might have made the biggest financial blunder in the history of the world. Unfair or not, the world is a much richer (in every way) because of men like Denham, Meredith, and Westinghouse.

We could be witnesses to the death of venture capitalism and its replacement by crony capitalism. If Obama is reelected, the end of unfettered venture capitalism is all but guaranteed. Certain GOP candidates seem as dead set against a healthy environment for venture capitalism as our current president. Crony capitalism already drives much of the health, energy, auto, insurance, and even major parts of food industries in America. Many (not all) farmers, hospitals, car manufacturers, "green energy" enterprises, small businesses, etc. look to Washington first for financing. Crony capitalism will be the end of America, as we know it, and too many of the GOP candidates seem to be comfortable with that fact.

The problem with crony capitalism is that it is grounded in coercion. The government does not consult the people who provide the investment money. Those investors are U.S. taxpayers. The taxpayer is forced to support the government's choice of winners. In venture capitalism the investors voluntarily risk their money. In crony capitalism the investor has no say at all in the investment. This was as true of George W. Bush's funding of "faith-based initiatives," as it is for Obama's "investments" in bankrupt green-energy companies like Solyndra.  In Chapter 5 of Throw Them All Out, Peter Schweizer has shown that three quarters of the first $20 billion the DOE "invested" in green energy went to companies with direct ties to the Obama campaign -- including at least ten members of Obama's election finance committee and over a dozen Obama campaign "bundlers."5

Forget political parties and ideologies. Elected government officials make "investment" decisions for political reasons. Much to many of his supporters' surprise, candidate Obama was not opposed to continuing Bush's faith-based initiatives -- he just wanted to make sure that his campaign contributors got the cash. As Obama declared in 2008:

As I've said many times, I believe that change comes not from the top-down, but from the bottom-up, and few are closer to the people than our churches, synagogues, temples, and mosques.

That's why Washington needs to draw on them. The fact is, the challenges we face today -- from saving our planet to ending poverty -- are simply too big for government to solve alone. We need all hands on deck.

Stop climate change and get a check from the Obama administration. Here's a quick example: Your church (or synagogue, temple, or mosque) might be eligible for a $200,000 grant to help save the planet. Click here.

If a taxpayer happens to think that churches, synagogues, temples, and mosques shouldn't be paid for "assessing and modeling population vulnerability to climate change" (because any effort on their part will have absolutely no effect on the climate, and because it's a mind numbing waste of money) -- that's just too bad. Under crony capitalism taxpayers are forced to support investments that have no connection to economic reality -- because the government's "investment" decisions are grounded in political expediency.

Some GOP candidates for president are openly attacking venture capitalism. A conservative "super pac" has paid for a grossly inaccurate half-hour special on Bain Capital that looks very much like the propaganda films I saw in the 1980s on state-controlled television in the Soviet Union about life in America.

Self-professed conservatives are advancing these attacks. This is not politics as usual. It is a sign of how little some conservatives understand the importance of free markets -- and the relationship of the Constitution to those markets. America became the wealthiest nation in history for two reasons: our Constitution and free markets. The former guaranteed the existence of the latter. Apparently, a large section of the GOP is turning its back on both. "Ignorant" is far too weak a word to describe the Republicans who are attacking venture capitalism. Ask Ben Franklin.

Larrey Anderson is a writer, philosopher, and senior editor for American Thinker.  He is the author of the award-winning novel The Order of the Beloved and the memoir Underground.  He is working on a new book, titled The Death of Culture.

1. Some economists claim that the financing behind Fairchild Semiconductor (established in 1959) marked the beginning of "true" or organized venture capitalism. But, working backward, American Research & Development was founded in 1946. (George Doriot, who is sometimes cited as the creator of venture capitalism, founded AR&D.) The premise that venture capitalism begins at some time X because investors have reached a level of organization Y is objectionable and purposefully misleading. The definition of venture capitalism as some level of organization (however "level" may be stipulated) provides bureaucratic cover for regulatory legislation like Sarbanes-Oxley and Dodd-Frank. If  "modern venture capitalism" began in 1959, how do its opponents explain a need for The Securities Act (1933) and, especially, The Securities Exchange Act (1934)?

2. Meredith's father made the actual loan. As an aside, I'm unable to find the first name of Hugh Meredith's father. Franklin does not give a first name in his autobiography. And it is not in the contract between Hugh Meredith and Franklin. If anyone knows the father's first name I'd appreciate your sharing it.

3. Denham loaned the money to Franklin. He died before Franklin could repay. The debt was forgiven in Denham's will.

4. Or was it £ 100? Franklin's autobiography suggests that £ 200 was pledged but only £ 100 of the loan was received. (See the bottom of page 31 in Franklin's autobiography here. Cf. page 53 in Walter Isaacson's Benjamin Franklin: An American Life.)

5. "Bundlers" package numerous smaller contributions into a "bundle" -- to keep the amount of money collected within FEC rules and presidential election finance laws.