Public Ventures

How Governments Can Run VC Funds

Idea: Governments should sponsor more VC funds that invest in their best local companies.

• The public should get equity in businesses that take government funding.
  • No more free-money bailouts for billionaires.
• Public VC funds share in the upside when the startups they fund succeed.
  • This incentivizes governments to invest more in earlier-stage startups.
• Public VC is a renewable economic resource.
  • Successful investments in existing businesses can directly fund new startups.
    • Governments should reinvest these profits, creating permanent funds.

Problem: Governments give away billions of dollars to companies and get nothing in return.

• Governments give companies money as grants or loans, not investments.
  • If a government-funded business fails, we get nothing.
    • No jobs created. No tax revenue.
      • Just a big bill of public debt payments.
  • Even if one of these businesses succeeds, we get no positive returns.
    • The public gets no share of the profits or equity in businesses we funded.

Current economic incentives socialize risk and privatize gains.

• Heads they win. Tails we lose.
  • All the profits go to the shareholders of those businesses even though we the taxpayers fronted the cost and risk in these new developments.
• These “economic incentives” aren’t even effective job creators.
  • The public often spends hundreds of thousands of dollars per job created.

Solution: Economic incentives should be investments, not free money.

• Governments should get equity in businesses who take their economic incentives.
  • Governments should also set governance requirements for businesses who take their funding.
• Public VC funds create positive feedback loops:
  • Successful investments return many times their initial capital to governments.
    • This funds many more new investments in the next generation of companies.
• When each investment has a 50X+ return potential, it’s easy to justify investing more.
  • Each hit means many more investments, which leads to more hits.

Public investments align incentives between governments and local businesses.

• Now both groups are focused on creating equity value, not fighting over taxes.
  • This incentivizes governments to invest in earlier-stage startups.
    • Governments currently prefer to fund large corporations because of lower perceived risk.
    • Public VC funds get higher returns when they invest earlier.
      • This creates a new path to early-stage startup funding.
  • This makes businesses more accountable to the public.
    • Governments should be a key shareholder and stakeholder in businesses they fund.
      • Voters should have a say over how their money is spent.
  • This rewards people for buying local.
    • This gives the public a feeling of ownership in their local economy.

An excellent example of a public VC fund is 43North:

• 43North is a public VC fund that invests $5M/year in the best startups in Buffalo.
  • This fund offers $500K-1M per startup and receives 5% equity in each business.
• Since 2014, 43North has invested $35M total in 59 startups.
  • One of those investments, in ACV Auctions, returned $75M+ to 43North when ACV IPOed in 2021.
    • 43North got a 75X+ positive return from its $1M investment in ACV.

How: Cities and states should run their own venture capital funds.

• This turns economic development from a cost center to a profit center for governments.
• Governments can start one of these funds for less than the cost of a single large economic development incentive that they usually give out to large corporations.
• Funds could be automatically invested (no need for fund managers).
  • This can make public VC funds self-funding, self-sufficient, and self-organizing.

Now: I want to create 43North for Detroit.

• Create a $5M+ per year fund sponsored by the City, State, and/or nonprofits.
• Invest up to $1M each in the best startups and manufacturers that move to Detroit.

Vision: Every government should have its own permanent fund.

• Example: Alaska Permanent Fund
  • The APF is a permanent fund established by Alaska to invest oil profits into future generations.
  • The value of this fund is now over $80 billion.
    • This allows Alaska to provide dividends of over $1,000 every year to all of its citizens and still grow the overall value of its fund.
• Permanent funds serve two key purposes:
  1. Reinvest profits from old industries like oil into new ones like technology.
  2. Recruit new citizens who can make new families, communities, and organizations.

Prediction: The best cryptocountries will leverage permanent funds to grow their citizenships.

• It will be common for new cryptocountries to promise their cryptocurrencies to new citizens.
  • Early citizens will invest their time and resources in growing their cryptocountry because this will increase the value of their cryptocurrency holdings.
    • This aligns incentives between countries and citizens.
• The best cryptocountries will be run like a related network of businesses, recruiting top talent that launch and scale their countries’ key services.
  • This creates new resources and revenue streams that will fund these cryptocountries for generations.

Risks: Sovereign funds could use their wealth and power in ways that harm the public.

• Example: Saudi Arabia’s Public Investment Fund uses its funding to influence politics and media.
  • PIF invested $2B in Jared Kushner’s PE firm and $1B in Steve Mnuchin’s PE firm in 2021.
  • PIF spent $120K/month on a US PR firm to do damage control on behalf of its leader Mohammed bin Salman after the assassination of Jamal Khashoggi.
• Sovereign funds can be honeypots for corruption.
  • The largest sovereign wealth funds control trillions of dollars, rivaling whole governments.
    • This concentrated wealth and power makes it easier to make insider deals with public money.

Question: Should Public VCs only invest in specific (e.g. local) startups?

• Pro: Investing all funds locally maximizes their direct economic development benefits.
• Con: By focusing on returns without limitations, these funds could return more money to their citizens, which is itself direct economic stimulus.

Public Ventures is one of my solutions to the World’s Biggest Problems.

• We need to redistribute spending from wasteful government programs to valuable, self-sustaining ones.

This idea is a work-in-progress. If you’d like to riff on it, hit me up @neilthanedar on Twitter!