The Mississippi Legislature should resist the siren song of the state’s economic development agency, which is seeking authority to set up a venture capital fund.
“What could go wrong?” asked Mississippi Today columnist Geoff Pender. “Well, if history is any guide — plenty. The last time the state tried this, millions of dollars were misspent and stolen, no new businesses got started, somebody went to prison, and the state spent years trying to untangle what went wrong.”
The money would come from the federal American Rescue Plan Act, which is sending $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 set up a private nonprofit organization that would work with full-time venture capitalists to invest in private businesses.
As Pender pointed out, the state has been down this road before, with dismal results.
In 1994, at the urging of state economic developers, the Legislature borrowed $20 million to set up the Magnolia Venture Capital Corp. The idea was the same as today’s: invest in small businesses with a chance of success and reap huge rewards as they grew.
That’s the same reason many individuals buy shares of publicly traded stock or mutual funds. But Magnolia Venture Capital involved taxpayer money, and the adventure turned out to be all risk with no reward.
Pender’s column said the nonprofit spent $4.5 million on questionable overhead expenses. Its CEO, later convicted of fraud and swindling, paid himself nearly $750,000, and companies he owned or was affiliated with got nearly $1.2 million of the fund’s money.
Just as bad, the fund did not help a single small business get started. It made only one investment, and the state had to repay the entire loan plus interest. The fund was a complete failure.
You know the old saying: Those who ignore the past are doomed to repeat it. It appears that some people in Jackson haven’t heard it yet.
This year, two bills on the new venture capital fund have advanced, one in the House, the other in the Senate. The MDA interim director said things are different today, and the federal money would be under much tighter scrutiny.
But the bigger question is, Why should taxpayer money be used for high-risk investments? High risk means exactly what it says — there is a high risk of the investor losing out.
The Legislature would be far more prudent to set up a nonprofit, professionally managed investment fund that put money into publicly traded companies. The return would be maybe 4% to 8% a year, which if left alone for a few years would grow nicely. And there would be almost no risk of losing everything.
This shoot-for-the-moon venture capital stuff is out of bounds, and thankfully a Senate committee took that language out of its bill. The MDA’s impulse to help Mississippi-based startups is understandable. But that’s not the state’s job. Leave that high-stakes poker game to the private investors.
