There is a new theme going around the internet that rich people don’t create jobs. The fact is, they are wrong. Rich people create thousands of jobs, simply through their spending. You might even say that since they pay the lion’s share of taxes, they are creating all the government jobs as well!
In April of 2007, I co-founded Hyde Park Angels. The reason wasn’t to create jobs. I did it with a couple of thoughts in mind. One was that as an independent trader that went back to school to get an MBA, I wanted to get a job in Venture. When I went into the market to try and get interviewed, no one would hire me despite my experience and gold plated degree. Trading your own money is a brutal business, and I knew that one day it would end for me. I had to have something else.
Traders on the floor used to see a lot of deal flow. But it was really random, and there was no contextual way to aggregate it and undertake rigorous due diligence. The second phenomena that caused HPA to develop is that we saw a gaping hole in start up funding. The Venture Capitalists weren’t taking risks on smaller companies. Along with that, very few of them would invest in the midwest. Entrepreneurs would simply leave for the coasts. We thought if we could create an angel group here, we could not only formalize the capital formation for start ups, but we could create a little ecosystem, and make some good money for ourselves in the process by investing wisely.
So, we started. We were a start up, if you will.
What’s happened since? We invested in 13 companies. We are actively engaged in due diligence with some more, and we constantly look at new deals. In the past two weeks, I bet I have looked at 20-40 deals, each one unique, and each one based in the midwest. Many others in our group have looked at different deals. Our initial seven angels have sprouted to 94. One of our companies, Gradebeam, exited and was bought by another company. We made a little money. Now the ultimate question. Did we create jobs?
Yes, we did.
If the angel investor didn’t write a check with their own money to invest in the start up firm, that entrepreneur couldn’t have gotten their firm off the ground. That means the 13 firms we invested in wouldn’t have hired one person.
Suppose there wasn’t any angel financing for any firms anywhere. What would happen? Entrepreneurs would have ideas for companies and form them. But they would have to grow from internal cash flow, then wait until they had enough assets to go to a bank and ask for a loan. Once they got debt financing, they could grow quicker and add jobs faster. However, that might have never happened, or taken years.
The pool of capital we created allowed companies to tap into it and grow faster. Small companies have grown, and gotten additional financing at higher valuations. What we have seen is that as a company grows, the slope of the line charting their growth gets steeper. As they mature, they grow faster. They create more jobs. The little engine that could becomes a freight train.
Successful entrepreneurs don’t buy a beach house and a boat. They usually take a short break, and then they get the bug and start up a company again. Life is like shampoo instructions for them; lather, rinse, repeat. They love creating and making little companies grow.
It is really offensive to say that investors don’t create jobs. Investing their risk capital into very risky companies that nine times out of ten don’t make it is one of the engines of a good capitalistic society. The one company that makes it creates thousands of jobs and opportunities that cannot be duplicated without that initial injection of much needed money grease that gets the ball rolling.
We ought to be giving tax incentives and praising the people that take outsize risks to invest in someone’s idea. However, it seems like a lot of people out there just want to whip them. Over the past three years, the amount of wealth in the US has deteriorated. Less wealth means less capital that people can invest in risky propositions. The last thing you want is people that are able to generate economic activity to take their ball and go home. You’ll be left with nothing.