Why not put my 2 cents in ? Here are a few notes that hopefully a couple politicians will take note of:
1. Carried Interest Taxes
Of course it should be taxed at normal income rates because that is what it is. But the bigger issue is the misrepresentation that it will negatively impact investment. That firms will not put as much capital to work because of the higher tax rates. To this I have one word, “nonsense”. What else do you think people who run Funds are going to do, work at Dairy Queen ? Get a job at a bank ? Fund managers get in the game because its an opportunity to make huge sums of money. No one is going to look at their business and say “Since I might make only $60mm instead of $80mm , I’m out. ” Doesn’t matter if its 60mm, 6mm or 600k. Fund managers always come from somewhere else because starting and running Funds is a chance to make a lot more money. They left jobs paying income taxes and they can deal with paying income taxes on their fund earnings.
2. Banks Loaning Money to Startups does not Create Jobs
One of the keys to failure in starting a business is borrowing startup funds. Why ? Because startups never work on a schedule and loans always have to be paid back on schedule. It’s a huge mistake to borrow money from a bank to get a business going, yet our politicians seem to think that more bank lending to startups is a key to creating new jobs. It’s not. In fact, banks are smart enough to realize that unless they can pawn the loan onto someone else, like the Small Business Association, there is no good reason to loan a startup money. Bank loans to startups are job killers, not creators.
3. The Y-Combinator Model is the key to Massive Job Creation
The best way way to create jobs in this economy ? Follow the Y-Combinator model and make all equity investments up to 250k dollars and held for at least 3 years tax free when sold. If you aren’t familiar with how Paul Graham and his competitors do things, you should be. They truly are the ones creating jobs. Speaking for myself, I have invested 250k or less in 8 or so businesses (some are still in process) in the last 12 months. Now I personally would have done it with or with out a tax break, but the way our economy works, with everyone hacking tax regulations, a tax break will push more people in this direction. The more NON RECOURSE money available to startups, the more startups and jobs created and the more likely a huge employer emerges.
Not only is there a chance a large company is built, there is a chance that the “next big thing” emerges and catches fire, leading to hundreds of thousands of jobs or more being created. I’m hoping that our politicians realize that LUCK is the key to getting unemployment back under 5pct. It’s going to take luck for someone to create the idea that we all missed and use angel funding from a source like Y Combinator to turn it into a company(s) that accelerate the economy much like The Internet and the PC Revolution did. If my memory serves me, Michael Dell, Bill Gates, Marc Andreeson weren’t out looking for loans from banks to start their companies. They used relatively small amounts of friends and family money. Make those investments tax free and we stand a chance to see the next generation Dell and Gates emerge.
(and no, this isn’t contradictory to my carry interest position. The investors should get the tax break, not the people who take a percentage of the profits (the carry interest) the investors would otherwise get paid).
3a. The Mobile Boom Could be a Unique Economic Catalyst if:
The boom in mobile devices and applications is reminiscent of the mid 80s when we had software developers and applications popping up left and right. Faster processors and regular operating system improvements created the same vibrant software ecosystem back then that we are seeing right now (Windows is to Mac in 1985 as Android Apps is to IPhone/IPad Apps in 2010). Which in turn created new jobs and even new industries.
Now is the time to encourage more of the same through tax breaks for small investments and extended holding periods in startups. We may also want to consider encouraging the creation of new Investment Banks that take small to medium size companies public. There has been so much consolidation and contamination in Investment Banking that no one wants to waste time on the $5mm dollar IPO. Yet that is just what the economy needs to create jobs.
The public markets were once designed to showcase and raise capital for up and coming, exciting companies. Now the only IPOs seem to be chinese companies and the re-flating of highly leveraged Private Equity deals. Selling stock to the public can not only create capital for the company, but it creates visibility as well. When we made the decision to take Broadcast.com public in 1998, we recognized that it was an important capital raise for us, but that it also was an important marketing event as well. Creating national recognition and public shareholder participation through IPOs is a missing link in revitalizing the economy. And who knows, maybe we will get lucky again and there will be a small bubble in a new technology that takes us out of the depths of this recession and accelerates recovery.
We may also want to consider encouraging the creation of new Investment Banks that take small to medium size companies public. ?? why
Comment by travestiistanbul -
Thank You 😉 Super
Comment by sehmus -
Mark, I wonder why you have not considered solving an issue that would resolve a LOT of economic problems: our overly-complex and economy-sapping income tax system.
When the current tax code is over 70,000 pages of rules and additional rulings that cost US$300 BILLION per year in compliance costs and may have driven over US$10 TRILLION in liquid assets owned by Americans out of the USA for tax avoidance reasons, small wonder why we have serious economic issues. Maybe it’s time to serious look going at least with the Steve Forbes flat tax plan, a tax system that has very low compliance costs and encourages Americans to keep their savings and capital investments in the USA, critical for REAL economic recovery. Indeed, Mr. Cuban, under the Forbes tax plan your investments will rocket up in value because with no more taxes on dividend payments and capital gains, the value of stocks will go way higher as everyone takes advantage of investing in the USA essentially tax-free.
Comment by sacto128 -
He probably doesn’t want to take the pay cut….
Comment by Matches Malone -
Mark-
have you put any thoughts into running for political office?
Comment by jrgraham1125 -
I agree with having tax breaks for business… as well as staying away from small business loans. They really are the killers and do not make much sense.
The key is to continually give small business the incentive to grow and add employees. Eventually a couple of them hit it big, and then you have massive employers.
Comment by jamakmfg -
Tax breaks are the key to jobs and growth in business. The more we tax, the less we create. You just have to remember that government money is your money. Re-distribution of wealth largely.
Comment by jamakfab -
I’ve never really thought about the loan being a job killer. I think you’re only considering the high-risk tech, social media, etc jobs. For jobs with steady, predictable income, say a hardware store in a remote location, I would think that loans would be a great way to get funding. I’m pretty sure I’m not going to find an angel investor for that business plan. Where else would I get money? From family? That probably creates more distress than a nice bank loan.
Comment by undfind -
Good article. i agree with your point about banks loaning to start-ups, money would be better funded from other sources of finance or venture capital firms. For example on my website freeblee.com which I use to get free stuff such as computers, I borrowed money from a bank and the business i’m in is quite slow to pick up and therefore ended up having to pay more interest for not repaying loans on time.
Comment by freeblee -
Here’s the perfect example of a business that is ready to take off that would have benefited from the Y-Combinator model.
Message to Mark: Do you want the last $250k of our $1MM raise? You don’t need a strategy deck to understand this: http://www.TheClassWatch.com
I’ll send you one if you want it.
Comment by maclish44 -
Mark said: “One of the keys to failure in starting a business is borrowing startup funds. Why ? Because startups never work on a schedule and loans always have to be paid back on schedule.”
I say, if we know this problem exists and startup borrowing is here to stay(thus getting a few million people into financial trouble every year) why not fight back by stimulating the tax break based on effective lending practices where the lendee’s success is somehow measured? same goes for house lending… the more a loan is paid back, the more breaks the banks get, the lesser the paybacks, the lesser the breaks… no? as supposed to getting breaks just because you loaned the money as I suppose the current system works…
Comment by elotrochele -
Sure, Jimmy, anyone could’ve done that 🙂 My thinking is that based on what he’s said on this post, and one he made over a year ago, is that he’s already chosen all the businesses that he’s going to invest in for awhile. I could be wrong, however, I might be right.
What I need to do is formalize my idea into a solid plan, at which point, I’ll realize that most are already doing it for less. Damn. Foiled again….
Comment by Matches Malone -
Mark,
Please send me an email at strengthchamber@gmail.com. I have a business plan you will be interested in looking into. Thanks.
Jimmy
Comment by jimmylam24 -
This is all great stuff! But do you really think that congress is going to think rationally about all of this? Nope! I think that they all have a degree in Stupidity! Congress doesn’t think things through! One of these days maybe they will but for right now, if it makes sense, it’s not going to work!!!
Comment by crouserclan -
This is all great stuff! But do you really think that congress is going to think rationally about all of this? Nope! I think that they all have a degree in Stupidity! Congress doesn’t think things through! One of these days maybe they will but for right now, if it makes sense, it’s not going to work!!!
Comment by crouserclan -
Mark, all your points are right on. Early stage companies are being killed by the lack of access to capital. Debt strangles these businesses. PE and Institutional money doesnt exist for early stage. We need to have tax policies that incent persons like yourself to do more like #3. Being shameless as this might sound, i could use your help. early stage entertainment platform does not fit the typical mold, like a RedSwoosh.
Comment by arusa1 -
shameless ass kissing in the commenters table … Your point about small business is actually correct … I work for a seed fund company and the usually it takes 5 years to produce a profit but I’ll agree with 3.
Comment by agapistudios -
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Once again, a great article by Mr. Cuban. Before this article, I didn’t know who Y Combinator. They seem to be a great source for seed funding and more companies like this would be great for the economy. There are too many people in Congress who don’t know left from right. If Mr. Cuban ever decided to run for Congress, he’d get my vote.
Comment by josephwesley -
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Well, is it good to be an activist investor? That article doesn’t seem to conclude in any meaningful way. I’d like Mark’s comments on this one, however, I think he’s abandoned this thread….
Comment by Matches Malone -
This current cycle must run its course. Just expect it to be bad and really bad for 5-6 years and then we will get our next innovative cycle. Then the bankers will be straight and ready to roll. Jon maintains a website about Austin
Movers.
Comment by austinmovers -
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Megan Jones of Hadley Partners just analyzed what you just did with Lionsgate, calling you an “activist investor.”
Here is the link: http://www.hadleypartners.com/InReelTime/2010-27-mark-cuban-declares-that-he%E2%80%99ll-tender-his-lionsgate-shares-to-carl-icahn-or-the-perils-of-activist-investors/
Comment by hpirt -
I don’t often disagree with you but loans to start-ups from banks are the backbone of the franchise industry. Yes these loans are guaranteed by the SBA but I can tell you for sure that in my 40 years of experience working in the franchise industry I have seen thousands of new jobs created in this manner. Do they all survive? Hell no. It still takes management savvy and I have watched many businesses bite the dust due to poor management. But I have also seen many successes that would never have happened without these loans. Don’t misunderstand, I think that, in general, bankers are the biggest idiots in the world. They only want to lend money when you don’t really need it and I have many, many experiences to back this thought. Without the SBA many of these businesses would not exist so the dichotomy for the person who wants to start a small business is to find a bank that really wants to be a part of the local community and still make reasonable loans. It’s a tough world out there and the “new economy” has been particularly devastating to new business starts.
Comment by agman65 -
Sounds like Mark has been reading this http://bit.ly/5HbMof, though if you take the time to read the full page it goes into excruciating detail. Its worth the read. It kind of explains what Mark is touching on.
Comment by jgervin -
As a founder of an Australian startup at the 3 year mark, and I do realise that Australia is not the US, I completely agree that easier access to funds for early startups would drive economic activity. We could have implemented a lot more features and landed a lot more paying customers if we had been able to hire a couple extra developers. As it stands we’ve all had to take a lot of personal risk to build this company to where it is – perhaps more companies would start if funding didn’t seem like an (almost) insurmountable obstacle for regular people on the ground with an idea and the passion to see it realised.
Comment by davidqhogan -
Most “startups” are new businesses which have a predictable revenue stream once they’ve overcome barriers to success. These are small businesses like stores, restaurants, etc. With a good business plan these are good candidates for small business bank loans.
Don’t let your tech bias let you think that “startup” only refers to high-beta tech companies.
Comment by shandrew0 -
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I’m a fan of the Ycombinator model, but only insofar as it is an experiment. There are many other similar experiments (Founders Fund, Techstars, Year 1 Labs, et al) but none are proven and certainly none are proven at the level of being a recommendation for a national economic plan.
The economics of Paul Graham’s fund as well as the companies he invest in is unproven. It should be studied but it’s too early to recommend it as “the solution.”
Comment by fnazeeri -
Our next boom should be GOV2.0. It can dwarf online advertising revenue in 5 years.
Web based automation, outsourcing, and head count reduction of Public Employees (Federal, State, and Local) at a annual productivity gain of 5% over the next five years would mean a cost savings of $400B annually – with no reduction in government services.
If the start-up world could keep 20% of that savings in revenue, it’s $80B. Not as big as commerce, but bigger than advertising.
Not too mention the ancillary benefits. Government that doesn’t make people sick to their stomach. 24/7 online & service call support to things like Medicare and Social Security. A true web based government means thousands of startups competing to provide private local services more efficiently. Even simple stuff like school lunches gets far better with web based transparency and privatization.
Since the web happened US industries have averaged that 5%, government hasn’t hit 1%.
Comment by Morgan Warstler -
Love the small investment bank idea Mark. I currently have treasury approval for NMTC syndication, now waiting on treasury grant to startup small venture fund and nonprofit incubator.
Next up – research on what steps need to be take in order to form a small investment bank.
Thanks for the words, you’ve enforced my conviction we’re going in the right direction!!
Comment by rjdjohnston -
I don’t know….maybe you could…like cut Capital Gains Tax to like…ZERO!
And we could also cut Congrees pay by two-thirds.
I’m ALL up for that.
Actually, let’s get rid of ALL of THEM and start the hell over.
Is ANYONE WITH ME ON THIS?
Comment by kennethholland -
Mark, do you really think more tax income for the government will solve anything?
Seriously?
Comment by Jeff Nabers -
We got down voted because we asked Mark to invest? What do you think he’s looking for? Why does this blog exist? Why is he so open with what he believes? He’s probably already decided that he doesn’t want to invest in me for whatever reason, but that should be his business, not yours. Don’t be hatin’.
Comment by Matches Malone -
I agree that bank loan is job killer, it’s not job creator.
Comment by analyticallaboratories -
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Both sides have a point on the carried interest thing. It’s easily solved: Treat the stake given the PE guys as income, valued at the same price paid by the investors. Treat any return over that level as capital gain.
The PE guys won’t like that. They’d have to pay tax on their position before it yields anything, and it might yield nothing. But that’s what risk is all about, no?
It wouldn’t be so straightforward for complex structures with minimum return levels and bonuses for returns over targets, but it’s a start.
Comment by chernevik -
Excellent YCombinator model. I would add a caveat to your second point. I am sucking wind after losing my $500K line of credit because the bank called it based on their “insecure” small print. Its hard to make product when you can’t afford the raw materials…
Comment by mtorme -
My only hope is that biotech finally starts to heat up. Two or three companies making serious, life-altering discoveries (that are easily digested by the public) would give us a boost out of this hole. I see no such innovation possible elsewhere..
Comment by chrisyoura -
Love your thoughts on the YCombinator model. I wish the govt would give incentives to create these incubator type programs all over the US. The midwest (Neb/Kan/Iowa) is rather lacking.
Comment by JP -
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c’mon man, don’t call for a bubbles. bubbles lead to busts. the cause of the great depression was the roaring 20s, and our current disaster stems from the dot com and housing bubbles. recessions are the cures for bubbles — the market liquidating malinvestments — but of course government getting involved to stop that and wall st begging for bailouts interferes with the natural free market process. look into austrian business cycle theory for a fancier explanation (then contact me if you need rebuttals for the haters).
fixing the economy begins with fixing monetary policy. we need to get back to a gold standard or something better than our current system in which all money is lent into existence — the inevitable consequence of which is perpetual debt crises.
if you really want to fix the economy, you should consider investing in my business which is about creating niche gaming communities with their own virtual currency. hire me to build a social game/community for the mavericks, or perhaps for one of your movies. it’ll only cost you a few thousand dollars (i have an ultra-efficient system rooted in free, open source software) and is likely to be profitable and cash flow positive very soon, like my site informedtrades dot com is. creating community currencies solves the monetary policy problem. it solves a lot of other problems as well. it’s the business plan that saves the world!
Comment by kidmercury -
I don’t believe the key is to discover a new technology as you state, but in creating new uses for currently available technology. And to create the transmedia experience. Moore’s Law will continue to be enforced, as well as, The Law!!! itself.
And, if you’d like to invest in a 9th business that will do exactly that, we should discuss privately.
Comment by Matches Malone -