Government agencies often engage in practices that are unseen and unknown to the taxpayers because there would be complaints were they in the open. Not that these practices are illegal, just nobody said, "You can't do that!" Some examples illustrate this point, show reasons why these practices are inappropriate, and suggest a solution.

The Department of Defense Appropriations Act of 2002 allocated $25 million to Department of Army to form a venture capital fund named OnPoint Technologies that was created to invest in small, young, growth-oriented companies developing innovative technologies of interest to Army. OnPoint then hired MILCOM Technologies, Maitland Fla., to manage the fund and place equity investments. Annual OnPoint infusions of tax money funneled via MILCOM has invested in nearly two dozen ventures. OnPoint is one of many such funds, the first one being In-Q-Tel started by Central Intelligence Agency in September 1999 with $28 million in taxpayer money and now operated with a $35 million annual influx of new capital. This fund and others obscure intent by calling equity placements "incubators," and what hard heart could be against nurturing the young and vulnerable.

Whether it is a captive VC fund run by CIA or contractor operated as with Army, there is no justification for government to be in the VC business. VCs use public money to compete with private sector lending and investing, in violation of Executive branch written policy since 1937 and fully documented by OMB Circular A-76, only justified by bureaucrats under a ruse. Federally owned VCs are not an authorized or enumerated power by the Constitution. The act of financing private firms by government, at the federal, state or local level, distorts the economy when government owns equity and results in redistribution of risks to the public and reduced returns to the private sector investors.

An example of this dilemma is in Minnesota, where they want to stop pharmaceutical makers from curtailing supplies to retailers who sell to state residents at subsidized (Canadian) prices while the state pension funds own equity in the manufacturers. So the retirement fund deviates from its fiduciary investment responsibility and into public policy making. Delaware, the state best known for being "corporate friendly," has established goodie bags to entice business to locate there for more than registration purposes. The state has a "small business seed fund," which gives little firms a $50,000 check to buy equipment and office space, etc.; has a VC fund and (Oh Yes!) an incubator. Utah has considered a state constitutional amendment to allow universities to accept equity in exchange for intellectual property, leading to the inevitable outcome of guiding private incentives toward public ends. At least the government of Maine requires its state VC to adhere to a policy of co-investment with a third, outside party, and Vermont's incubator only works if federal matching funds are applied.

Under the guise of replacing foreign aid, many agencies are involved in venture capital, including Agency for International Development ($1.27 billion in nine funds), Overseas Private Insurance Corporation ($3 billion) and International Finance Corporation unit of World Bank (53 VC funds with 37 different managers). This data is ten years old! In truth, these international investors do more harm than good because they usually divert focus from the neediest sectors, operate under bank secrecy so are largely unaccountable, harm host nation capital markets, select winners (and therefore losers) in immature industrial economies and otherwise facilitate capital flight due to interference. It is evident that U.S. government investing in other nation's private sectors is even worse than at-home operations.

Encouragement by government to seek money with less hassle is not good for America. The prime culprit is the Small Business Administration's (SBA) Small Business Investment Company (SBIC), the primary licensed lenders of government funds injected into SBIC pools of private capital. SBICs typically invest from $150,000 to $5 million for an equity position and may be affiliated with large commercial banks for other type lending.

A major concern is the presence and pervasiveness of government-owned venture financing in the private sector. It is a short step from equity investing to management control in the private sector, and governments should do neither. My view is that all federal agencies should be legally prohibited from venture capital investing, in any form, in any private corporation. If you see the wisdom of this, suggest it to your Congressman and tell him it is not government's job to be a VC and to return your tax money. See the response you get. That will say a lot about representative government and your voice in it. IH