HOW OTHERS CAN INVEST LIKE BUFFETT
Governments are taking unprecedented steps to mobilize $’s to support small businesses and individuals impacted by the sudden stoppage of business activity due to social distancing.
Just like Warren Buffett does at Berkshire Hathaway, the Federal, State, and Local Govt.s can arbitrage their low cost of capital (current borrowing costs) and invest in pools of equities (startups) that will deliver a higher return over the life of the borrowed funds.
There is actually legislation introduced by Senators Amy Klobuchar (D-MN), Angus King (I-ME), Chris Coon (D-DE) and Tim Kaine (D-VA), with bi-partisan support from Rep. Pelosi & Sen. McConnell, to mobilize Federal dollars for just such a strategy — targeting those communities largely overlooked by the existing venture industry.
A ‘Fund of Funds’ strategy, where the Federal Govt. (along with State & Local Govts) invest the proceeds from a specific debt offering, allocating capital in pools that than are allocated into sequentially smaller/localized funds, which can then deploy capital into their local startup ecosystems efficiently, via:
- Standardized fund structures
- Low Fees
- Standardized term sheets & dollars available to each startups — as long as they have achieved standardized, de-risking milestones.
- Each startup term sheet qualifies for the Qualified Small Business Stock (QSBS) tax incentive, which de-risks investments from the local angel/venture investors.
The venture model is largely unchanged since it was first established in 1959, following the Small Business Investment Company Act of 1958. Per Tom Nicholas, Professor of Entrepreneurship at Harvard Business School, who wrote of this very fact in his recent book — that may be the consummate work on venture capital — ‘VC-An American History’;
The fact that partners’ talent matters most is an important finding, and is consistent with the fact that the VC industry has been remarkably devoid of organizational innovation since Draper Gaither and Anderson was founded as a limited partnership in 1959. pg 311.
With the unprecedented times and Monetary and Fiscal Policy actions, it is time to think outside the box in how we support our ‘economic immune system’ — the entrepreneur.