Imagine you have devised a new way to strap on wings and jump off a building in such a manner that you land perfectly safely.
The idea works perfectly fine on paper and the market is obviously anyone living or working in a high store building where the device could become as much of a feature as the fire extinguisher.
But the problem is you don’t have the required funds to build the prototype, test it, refine it, and maintain a roof over your head at the same time.
Perhaps you’re an engineer with a great idea on how to produce solar or wind energy more efficiently. No one believes you because it goes against all current thinking, but some specialists think it could be promising, even though it would probably not work.
You’re convinced. What do you do? What Tesla did was feed the pigeons. And what many very smart men and women in Germany and across the world are doing is effectively feeding the pigeons.
Because to bring ideas to the market currently is very difficult, and in many ways it is the preserve of the rich rather than the preserve of the intellect.
Entire industries of Venture Capital have risen to fill some of the gaps, but as one can expect such VC firms are few in number, and the sums they require in return, even for investments as small as $100,000, are very punishing.
Our economy, therefore, is in no way as dynamic as it can be because of only one reason. It is illegal to invest in a start-up due to a law enacted more than a century ago, during a time of horses and no cars.
That means to launch a start-up is incredibly difficult. The internet and the digital revolution has made it easier, but even there, even in coding fields, it can be very difficult to fund what can be stupendously good ideas.
The end result is monopolies and perhaps even stagnation. Our high street has become a store chain after store chain. The same old brands, offering the same old things.
This can be most noticeable in industries like electricity. Our governments are not happy at all that energy companies are quick to raise up prices if wholesale prices rise, but hardly lower them if wholesale prices fall.
To express their displeasure, they go on and talk the talk, but energy companies don’t have to listen, and they don’t listen. Because they are monopolies of a necessary services, so checkmating governments as they don’t want to take them into public ownership, and because the only language they know is that of the market.
Yet how much money would you need to launch a new energy company? And if the proposed profit returns are say 10%, what VC would take that bet when they have plenty others suggesting returns of 1k% or more?
Studies suggest it costs about $5 million to launch an IPO, so allowing one to legally raise funds from the public, and then another $2 million or so per year to keep the IPO status. It costs only $60,000 to launch an ICO.
Once one reaches the level of an IPO, the company already has monopoly like status in the market, with growth potentials for investors limited. To challenge that monopoly status, you need $5 million for the IPO itself, then another perhaps $1 million or so for your own operations.
To raise that $6 million you’re limited to banks or VCs. Banks will of course not give it and VCs will want an arm and leg for it.
That’s the entrepreneur’s problem, but savers have an even bigger problem. Money does not keep its value due to inflation. It must therefore be invested. The options are bonds or savings accounts, which is no different than under the mattress, or the stock market.
The stock market generally grows at around 6%-8% a year. If we take off inflation, we’re looking at 5% a year. Fairly decent, but if we consider risks, like the 2008 crash and many other stock market crashes we have seen, it might be putting all your eggs in one basket.
To diversify you could choose to invest in housing, but from a macro perspective, that is a big problem in itself. Housing is a necessity. If young people can no longer afford one because houses become casinos, then you might have riots on your hand, or squatting movements.
What if those savings instead go to where they are actually needed? What if they fund those wings? What if they fund those bright engineers?
Let’s say you need $500,000. Let’s say 500 investors invest $1,000 each. Let’s have an average pensions portfolio of $100,000. Let’s allocate $10,000 of it to start-ups. It’s about 10%. It burns, it burns. Nine will fail, one will succeed and reward you perhaps $500,000.
Wealth creation. Productive wealth creation. Banks are meant to do the above, as are pension funds. But it’s not their money. They don’t really care. They get paid the same amount whether they make gains or losses. No incentive.
Doubling your money, however, is quite an incentive for the individual. So on what basis are they prohibited from investing in value creation?
Of course there are cheaters, as in every other field, especially in the stock market. And like the rest of us, those cheaters like to play with the best toys too. The newest tech, the most promising new thing. But we’re not going to ban nice cars because bank robbers might run fast with them. So why should we ban start-up investing because a tiny minority might cheat?
Why should we chain the very many good, decent, honest people, because some stupid idiots think their effort in cheating is less than using that work towards productive uses?
Man will never be perfect, which is why the rule of law is hailed as one of the key reason for our success. But that rule of law should never presume guilt. Nor should it think that no risk taking is better than risk taking.
Calculated risk is the engine of our economies. We take such risks everyday. And having monopolies is one of the biggest such risk as we have seen.
Competition must be encouraged. Start-ups, in our knowledge economy, are vital. That doesn’t mean free for all. Reasonable guidelines, with stratas, are easy to establish.
Anyone that wishes to raise up to say $100,000 or $1 million is taken on trust. If they are found to have cheated then they are punished. Everyone up to say $20 million might perhaps need to produce an audit report of profits, losses, user numbers, if they have any, or a third party check on their experience to verify it is what they say it is.
Anyone above that then should go through reasonable more stringent checks especially if it is their first public fundraising round. Including perhaps explanations why they want to raise as much, with detailed publicly published financial reports and so on.
In this way one can balance the desire of innovators for value creation, their need for funding, the need of savers for returns, and the need of everyone to not be cheated.
In the process, one can instill dynamism into the economy. So the bright engineer does not need to go to the monopoly with their idea, thus keeping the monopoly complacent, but can go to the market and disrupt the monopoly to the benefit of everyone.
So increasing productivity in a boom of creativity and innovation as we usher in a new millennial optimism.