Senator John Thune chaired his Senate Subcommittee on Communications, Technology, and the Internet’s hearing yesterday on expanding access to venture capital. Thune’s thesis behind this hearing is that capitalists focus too much of their attention on starting businesses in California, New York, and Massachusetts:
In 2019, California-based companies received roughly 50 percent of all venture-backed investment in the United States.
That same year, just three states – California, New York, and Massachusetts – accounted for almost 75 percent.
There are many valid reasons why this is the case, which I look forward to exploring with our witnesses today.
However, this geographic imbalance also means that a majority of regions within the United States are often shut out from the kind of investment that creates jobs, revitalizes communities, and enables the pursuit of the American dream [Senator John Thune, opening statement, hearing, Senate Subcommittee on Communications, Technology, and Innovation, 2020.12.15].
Thune recruited Rapid City software vendor Ray Hespen to talk about the challenge he faced when he chose living in Rapid City over easier access to coastal investors:
The options for fundraising were minimal. It felt like it was either regional angel players or venture capitalists from the coasts. The angel groups often could only commit to small investments which would have required a large contingent if we were to raise enough to give us the runway we needed. Alternatively, we could participate with the coastal VCs.
Even during this initial period of fundraising, we received some term sheets that, especially in hindsight, felt opportunistic. Since we were in South Dakota, we wouldn’t notice some egregious terms. Due to these mentors’ advice, we were able to avoid some pretty serious mistakes early in our company. Ultimately, we partnered with a fantastic smaller regional capital partner who treated us fairly and has been a great asset since the initial investment [Ray Hesper, prepared remarks to Senate Subcmte CTI, 2020.12.15].
Hmm… so Hesper lived, learned, and got the cash he needed to start his company. Why, then, are we having a Senate hearing? Where’s the market failure requiring a government solution? Is it really a problem that capitalists operating in a free market choose to invest in more viable, opportunity-rich environments than others? Even if there is a problem with the free market picking winners, Senator Thune himself said in his opening remarks “the private sector is primed to solve” this “geographic imbalance”:
At the end of the day, it is not going to be politicians and regulators driving the next wave of American innovation.
It will be the private sector that will ultimately expand economic opportunities across the United States.
And it is my view that the best the government can do is to fully recognize this and then actively try to not stand in the way [Thune, 2020.12.15].
Do you hear yourself, John? One moment you whine that the free market is treating South Dakota unfairly by betting on big-city businesses. But the next moment you say the same private sector that’s making choices you find objectionable will magically make different choices if government takes no active role in changing the economy.
Thune mentions the merits of the socialist expansion of broadband to entice more venture capital to rural South Dakota and other places the free market would otherwise ignore. He opposes other socialist interventions like nationalizing the 5G spectrum to ensure equitable access. So it’s unclear just what role he sees for government in getting sensible investors to make a riskier bet on smaller, more remote markets instead of the proven fertile economic grounds of the coasts.
Hmmm… maybe Senator Thune should hold his next meeting on attracting venture capital to rural areas in Brookings….