BusinessTN

Venture capital is a marvelous engine of economic growth. Not surprisingly, many venture capitalists want to get government out of their way, but their relationship with laws and lawmakers is much more complicated than that. Mutual respect and understanding are crucial.

First, and most importantly, politicians must preserve an environment in which venture capital can be raised, managed and harvested in liquidity events within seven to ten years. Policies that promote savings, investment, prudent risk-taking and success are absolutely necessary. The economist Joseph Schumpeter described capitalism as the process of "creative destruction." New companies are born; companies that fail to innovate wither and die.

Second, pro-growth policies can benefit everyone, not just the wealthy. As President John F. Kennedy said, "a rising tide lifts all boats." The economist Hernando DeSoto wrote in The Mystery of Capital that even the poor can better themselves under a strong legal system of property rights, law enforcement, available credit and free enterprise.

Third, taxation must be kept to a necessary minimum. Justice Oliver Wendell Holmes said that "taxes are the price we pay for civilized society." Despite the endless bickering over taxes, the average rate of federal taxation under Republican and Democratic administrations has averaged 18.4% of GDP for the last 50 years. This has been a durable bipartisan consensus. It must have worked well because, during that time, the United States became the only superpower and home to the best VC community in the world.

Fourth, VCs bet on the jockey, not the horse. Proven managers and moneymakers are rare; they must be nurtured and cherished. It takes special skills to run a successful business. Motivating workers, seizing market advantages, and adjusting to changing circumstances are traits that cannot be taught in business school and deserve to be rewarded. A stake in the business—good old equity—is usually the best way to align the interests of owners and managers. Of course, Warren Buffet still prefers to pay cash bonuses to see if managers invest in their own businesses.

On the other side of the coin, too many VCs are trying to take advantage of government. Unfortunately, this scheming is often successful. Here are some abuses to watch for.

First, a failing business plan should not be rescued by lobbying Congress for a loophole or unfair advantage. VCs should win in the real marketplace, not the political marketplace. Today some companies, and some entire industries, are kept on life support because their influential backers get special favors from Washington.

Second, government has no business investing in venture capital. Although most VCs are not brazen enough to raid the Treasury, some have. I opposed a $10 million "investment" by the Pentagon last year in a Florida venture fund. The fund had already received $61 million in taxpayer dollars, had little to show for it, charged high fees, and, to top it off, had structured the investment as a gift, with a guaranteed zero return on capital.

This last point requires some elaboration. There is no real shortage of capital; there is often a shortage of good ideas and good managers. VCs who raise money from the government have usually failed to raise private dollars. Government officials who invest the money usually have no idea what they are doing. This combination of avarice and ignorance is toxic for the taxpayer.

Finally, VCs should be willing to give back to their nation as patriots, in addition to their role as major taxpayers. Government needs their brilliance, energy, and ability. VCs should not be discouraged by Mitt Romney's unsuccessful run for the presidency. We need VCs to run for office, to run federal agencies, and to run campaigns for those who are willing to serve. America will not be the best business platform for long if we do not have the best minds in the country helping us remain Number One. With enough VC input, your taxes could become one of your best investments.