Friday, July 08, 2005


Third Frontier or third strike?

We're glad to see that there's increasing interest in the pros and cons of Taft's so-called Third Frontier proposal.

The good folks at the Cleveland Diary have started to weigh in on this, and it looks like there is interest at Blue88.

Our take on the TF proposal itself - leaving aside the horse trading involving the Democrats that may go on to get it on the ballot- is fairly simple: TF is BS.

Now we are speaking here in fairly general terms, but it's important to acknowledge that the centerpiece of the proposal is to use bond money to create a capital pool to support and aid emerging technologies and businesses. That's a bad idea.

When it comes to government involvement in capital pools for something other than public improvements, we are extremely conservative. There is already a huge, flexible and hungry pool of private investment capital available. For better or for worse, the developed world's capital market are extremely robust and mature. If someone truly has a better mousetrap, there is plenty of capital to go around. The key word is truly for reasons we will explain below.

So why does Ohio need TF if there is already this huge capital market? Good question! It's serves two purposes that we think are not remotely in the public's interest.

The first purpose is to provide capital to ventures that the private capital markets have passed on. In other words, to back "losers." Losers in the sense of either faulty products, faulty technologies, faulty strategies, or faulty management. Losers who won't admit they are losers. Losers who try to hide why they are losers. And, losers who are so politically connected that they don't even give a shit - they just want to take the money and run.

Even if we give these entrepeneurs the benefit of the doubt and assume that both potential "winners" and "losers" seek TF funding, can government do a better job of picking the winners than the private sector? Hardly.

The state of Ohio doesn't 't have the necessary skills and business background. Just try to find an MBA that works for a state agency or commission. On top of that, the intrusion of politics on government will interfere with objective assessments. If the BWC debacle teaches us anything, it's that business will do anything and everything to try to get government officials to abandon their objectivity. Some of the names on the TF Advisory Board sends shivers down our spines. And the lack of independent business and financial experts on that board is glaring.

The second purpose is to provide capital at a discount. Private sector investment capitalists adjust the costs of their capital to account for the risk that's involved. Understandably, those who are seeking the investments often think the costs are too high, but more often than not, venture capitalists are very good at setting their prices, otherwise a competing venture firm could step in.

But TF holds out the possibility of undercutting the private investment firms. But why should it, if it doesn't adequately compensate the TF fund for risk it takes in making the investment? And, why should a government agency provide what is essentially a subsidized loan to an enterprise that could get funding elsewhere?

TF will never be a huge success (in terms of economic development, jobs, and capacity) because it is a money-driven approach, not a strategy-driven approach. It has the potential of turning into one more corrupt pig trough that gets Ohio no where.

The right approach would be to one that is focused on leveraging Ohio's existing and unique strengths to build a long-term competitive strategy. (We'll be writing more on this in later posts.)

Every state is trying or has tried to cook up something like TF, but taking cookie-cutter approaches is such an obviously doomed plan that it makes us even more convinced that the Republicans and their business cronies are in it soley because of TF's pig-trough potential.

And we think that voters sense that its a potential pig trough that will have little or no impact on the state's economy. They are right.


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