I have to admit that when thinking about writing this post, I am highly idealistic, naive, and biased. Also, my undergradate degree in Economics makes me far from an expert in discussing macroeconomic issues, but it’s fun to give my two cents on what I think can stimulate growth with the current dollars that have been allocated. And yes, I am playing Monday morning quarterback. I am in support of the current stimulus plan, I just thought that some additional measures should be layered in to ensure innovation from the people who may not be the most connected.
Two of the critical areas that the Obama stimulus package aims to improve is Education and Health Care, some of the slowest moving industries out there. Traditionally, these industries are all about red tape, bureaucracy, and being resistant to the use of technology. Billions and billions are going out to these spaces, yet it appears that the funds are going out to the major players out there, who have in many ways, have been the reason that we’re in this problem right now. What do you expect a capital inefficient Citibank to do when they become flush with new funds? They attempt to buy a new jet!
If President Obama was listening to me right now, I’d tell him to earmark, even at the lowest levels, a billion dollars to funding companies that address the key inefficiencies in the state of Health Care and Education. I’d tell him to set up a website, that mimics Dell’s Ideastorm, or Digg, where start-ups in these spaces submit their start-up, explain how it helps with health care/education, the management bios, funding needed, and how it improves the current state of things. The people of the United States vote up the best ideas, the best companies, the best management, the best business models, and the government takes an equity stake, while funding a percentage of the companies with equity capital. This is a crowdsourced, government-sponsored venture capital program that empowers and rewards the best of the best, which is a bottom-up approach to funding change, in my opinion. I imagine that a bulk of the stimulus dollars are going to the big companies, but why not give the start-ups a crack at these problems?
If you think this is crazy, look at the UK, which has established a $1.5 billion start-up fund to stabilize the start-ups that are struggling right now to stay afloat in this turbulent global economy. As Paidcontent states, the UK is trying to innovate out of the recession. What I have not read about what they’re doing is providing a transparent way in which start-ups are evaluated on who gets the money, and why. That is why the Ideastorm-like crowdsourced concept can be an interesting way, if protected from gaming the system.
Here’s how the back of the envelope math works:
$1 billion in funding for both health care and education= $2 billion total
Average funding needed per start-up = $25 million
Total number of companies funded = 80
Average salary per employee = $100,000/year
Number of employees needed= 50 employees
(assuming 2 year runway of funds, and 40% allocation to salaries)
Money spent per year by the start-up on other businesses= $7.5 million resulting in 30 new jobs/company
Which gives us a total of new 6,400 employees (number of employees for newly funded company and the company that it buys from)
And if you continue to do the math where you calculate what the new number of employees that need to be calculated to cater to the companies buying from them, you get close to 20,000 new, highly paying jobs. Therefore you are spending $100,000 per year in tax dollars per new employee for $100,000 in average salary for each new employee. But on the flip side, think about the negative externalities: Increased debt, decreased tax dollars received, reduced spending, increased need for government benefits (like unemployment), but I think the biggest negative externality, is that even if a handful of companies solve a portion of the major inefficiencies in these troubled spaces, the social benefit and transformation will result in several orders of magnitude more than the $2 billion invested. Imagine the impact if you add in substantially more than $2 billion or reduce the average salary per employee 15% or even reduced the average funding need per start-up. A little sensitivity analysis could be interesting. If you look at the current stimulus bill, the government is spending $300,000 per new job created.
What do you think? Is this feasible?
3-4-09 Update: Reid Hoffman, CEO of LinkedIN has a complementary post here on Techcrunch