FEE: There Is No Government Shortcut for Entrepreneurial Success

FEE: There Is No Government Shortcut for Entrepreneurial Success

Senator Elizabeth Warren is right that the path to wealth is through entrepreneurship. The senator recently released her “Leveling the Playing Field for Entrepreneurs” plan, a proposal that claims to help minorities who are starting businesses. This plan comes on the tails of her indignation toward wealthy Americans, referring to them as “freeloaders.” Perhaps she fails to realize that many of the emerging entrepreneurs she’s attempting to help are hopeful that they, too, will achieve such economic prosperity as those “freeloaders” she and many other Democratic candidates enjoy attacking.

Even though her plan is marketed as for minorities, significant funding could go to white Americans should they apply and meet the hardship requirements.Senator Warren’s policy prescription is merely the latest in a long line of government attempts to interfere with America’s entrepreneurial ecosystem, a system that has thrived, in large part, because of limited government interference. Much like crony capitalism, a government practice of selecting winners and losers using taxpayer-funded incentives, it often causes more harm than good.

It’s also interesting to note that even though her plan is marketed as a benefit for minorities, a significant percentage of the funding could go to white Americans should they apply and meet the hardship requirements, such as proving “through a preponderance of evidence” that they are “socially disadvantaged.”

Warren is right to point out that federal policy has a heinous history of disenfranchising minorities. There is a dark legacy of legally instituted racism. Slavery, Jim Crow, and redlining are several sobering examples of the widespread injustices committed against minorities. As a result, the Civil War inaugurated a period of reckoning that extends even until this day as we grapple with racial tensions in our nation.

Although undoubtedly well-intentioned, some of the attempts that have preceded plans like Warren’s have caused more harm than good. In his book Shame: How America’s Past Sins Have Polarized Our Country, author Shelby Steele asserts that in the 1960s the political elite took it upon themselves to set aside values such as fair competition by merit, individual initiative, and equality of opportunity in an attempt to achieve racial parity. We traded these previous values for a “new post-1960s liberalism [that] screamed…[limited government] was not enough.”

So, if Warren’s intrusive plan isn’t even worth the internet real estate it occupies, what is the best way forward for emerging entrepreneurs?Steele notes that the politicians believed we “needed a proactive liberalism that could guarantee results, not simply refrain from discrimination.” Steele explicitly calls out policies like affirmative action and President Lyndon Johnson’s War on Poverty as misguided culprits and inhibitors of progress among minorities. Warren’s plan is guilty of many of these same flaws.

Like Steele, we argue that the best way policymakers can serve minorities is by promoting government restraint and guaranteeing individual rights and liberties. By doing this, we’ll more fairly empower all would-be entrepreneurs irrespective of socioeconomic status or race. Warren’s belief that government is capable of “leveling the playing field” does a disservice to the unique entrepreneurial ecosystem that free enterprise facilitates.

So, if Warren’s intrusive plan isn’t even worth the internet real estate it occupies, what is the best way forward for emerging entrepreneurs? A business environment that allows fledgling entrepreneurs to rise or fall on their own merit is essential to the free market. But many times, founders of young startups don’t know where to begin. Below are several basics you’ll want to grasp as you prepare to launch your own startup.

Many would-be entrepreneurs daydream about coming up with the next unicorn, a startup business valued at over $1 billion. Yet, this unicorn isn’t merely the stuff of myth, and it will take more than an amazing idea to make it fly. To successfully launch a business, you need a viable plan, as well as the ability to carry that plan out. Yes, this includes talent and skills, but it also means securing capital if you hope to move the business from a theoretical planning phase to a tangible implementing phase.

Most entrepreneurs start their business with funds from their own savings, as well as help from friends and family. For entrepreneurs with a promising product, experience, and the necessary talent and technology to make a business successful, money is available. There are a variety of free-market sources of capital for early-stage and emerging companies, including loans or equity investments from angel investors, and at a later stage, venture capital and private equity.

The Warren plan incorrectly uses the term “equity.” In reality, Warren is proposing a redistribution of wealth from one group to another. It’s a grant, or maybe even a subsidy, but not equity. According to private equity researcher Matthew Barch, equity is “the right to all residual cash flow of an entity after all other liabilities and debt have been satisfied; but it’s also the basic form of ownership. Equity equals ownership.” And debt, simply defined, is the “right to receive periodic payments of principal and interest, until the original amount borrowed is paid in full.”

Whether it’s a venture capitalist or a private equity firm, successful investors provide capital in exchange for equity.Whether it’s a venture capitalist or a private equity firm, successful investors provide capital in exchange for equity. Unfortunately, Senator Warren has also proposed quelling private equity, which would further reduce the options available to entrepreneurs.

Warren also proposes that private parties will be inserted into the process to ensure that taxpayer dollars earn a return on investment, yet she fails to recognize that the federal government doesn’t directly earn a return on its “investment” because the funds are given to select individuals as a grant, which means they won’t be repaid.

Warren loves talking about accountability, but she means accountability to politicians and bureaucrats and fails to recognize the accountability built into private investments. The entrepreneur must be accountable to investors or lenders for the use of the borrowed/invested funds. Whether as debt or equity, investors will insist on investor rights or covenants that limit the “use of proceeds.” Founders of early-stage startups don’t get a payday when a venture capitalist injects $5 million into a business. Instead, the founder may essentially enjoy a bonus (and have back pay finally caught up), but the investor will insist the funds are used as growth capital.

The truth is that there is no government shortcut for entrepreneurial success.If an investor provides $5 million to buy new equipment, that, and that alone, is what the money will be used for.

Thankfully, investors who work with startups often double as mentors. By working alongside budding entrepreneurs, investors help these fledgling capitalists learn the ropes of the business, such as capital management, accounting, sales strategies, and how to make wise business decisions. The oversight by a local bureaucrat will be no substitute for that experience and the lessons an entrepreneurial mentor can provide.

The class of people Warren wants to tax to fund the program is often referred to as the investor class. They are experienced in making investments and allocating capital. The federal bureaucrats her plan would replace them with? Not so much. Investors are often close enough to the investee that they’re readily able to allocate capital based on the expected return on investment.

Warren’s plan deprives entrepreneurs of this meaningful mentorship and oversight and instead places bureaucrats at the helm of capital allocation. To the extent that her plan can be called a plan, it’s a recipe for crony capitalism and abuse, teaching entrepreneurs that the path to dollars is merely a matter of satisfying bureaucrats, not actual customers.

Too often, public policy hinders American workers, whether it’s in the form of harmful tariffs or creating needless barriers to employment, such as excessive occupational licensing requirements. But it doesn’t have to be this way. Public policy should empower entrepreneurs of every color by removing unnecessary burdens and restrictions on competition for all Americans. It is often said that “regulations favor the incumbent.” So policy should ensure that new business ventures are not hamstrung by overbearing regulations and costly obligations like above-market minimum wage laws or sick-paid-leave obligations.

The truth is that there is no government shortcut for entrepreneurial success. Regardless of whether Warren’s plan ever becomes law, an earnest hustle, a well-executed business plan, and flesh and blood relationships with investors, peers, and mentors would be a much more reliable path to long-term entrepreneurial success for Americans of every hue.

Doug McCullough, Director of Lone Star Policy Institute

Brooke Medina, Communications Director, Civitas Institute

Originally published in Foundation for Economic Education