State Must Take Equity Stakes in Rescued Companies

When State (taxpayer) money goes to support a company or bank then the State should take a shareholding in that company or bank – big and small, well established and start-up… 

SME’s and many other companies are the future of economic growth and they are solely needed, but they are the most vulnerable today.

You can do it directly or indirectly for different types of companies – through Finnvera, Solidium Oy, Vake Oy or though a special purpose body created and manned for the job.

It is not rocket science but a clear common sense policy.

This is nothing new – the same happened with General Motors, with Royal Bank of Scotland, Lloyds Bank. The French and the Germans have had these state-owned for decades KfW and Caisse des Dépôts et Consignations – both are investment arms of the state.

Assistance in the form of grants, loans or guarantees should come with clear conditions for an equity stake, in addition to clear stipulations that of continuance of service and employment for workers and that bosses do not pay themselves huge bonuses when the pandemic is over.

“The bailouts of 2008–9 saved the banks (but mostly the bankers), thanks to the execution by then-treasury secretary Timothy Geithner who fought for bank executives against both Congress and some other members of the Obama administration. Bankers who lost more money than ever earned in the history of banking, received the largest bonus pool in the history of banking less than two years later, in 2010. And, suspiciously, only a few years later, Geithner received a highly paid position in the finance industry.” write Mark Spitznagel and Nassim Nicholas Taleb in Medium, 26th March 2020. 

This articles is well written and thoughtful and worth reading in its entirety.

This assistance is different from bailing out bad companies but an opportunity for the state, using cheap loans, to acquire stakes in fundamentally strong companies whose short-term operations have temporarily been halted because of the pandemic.

The same argument must be used for start-up businesses that have seen a fast and severe contraction of investor interest funding rounds have collapsed. Unlike the big funded start-ups that have already received huge infusions of venture capital money, there is a pipeline of start-ups s that will grow quickly in the future. However these small companies must rely on angel investors and small seed funds, investors who have very low levels of financial resources.

Such models already exist in venture capital across Europe. Many investors. It would be easy enough to copy a proposdal put forward by Brent Hoberman, Chairman and Co-founder of Founders Factory and Firstminute Capital in the Financial Times 28th March 2020 (Paywall).

“To keep them alive, the UK should create a Runway Fund to give extra time to these early-stage businesses. It would provide convertible loan notes with discounts to start-ups of up to GBP 500,000 to give them at least nine more months of operations. The loan would then convert into equity at the next round. A British fund of GPB 300 million could invest initially in around 600 start-ups. Done across a broad range of companies, such a fund should provide a profitable return to investors and salvation for early-stage UK tech. This is not a handout, it is an investment that should generate returns once we get back to a new normal.”

Without such a solution many promising start-ups will be lost for years to come. These are the businesses that will help the economy to bounce back after the crisis – with relatively little cash much could be saved.

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