Wall Street needs fixing. The U.S. job-creation engine continues to sputter. Growth remains subpar. Perhaps it's time to call in the angels.
No, not Gabriel & Co. Let me explain.
The big focus in Washington right now is regulatory reform of the banking system. The effort is gaining momentum following the Securities & Exchange Commission's civil fraud charges against Goldman Sachs Group (GS) on Apr. 16. There's no question that an overhaul is needed. Without better regulation, the existing "too-big-to-fail" policy all but guarantees that financiers will eventually drive the economy back to the brink of collapse. The money crowd has learned that profits at globally interconnected financial firms remain privatized, even as their future losses have been socialized.
Still, it's disturbing that the focus on preventing another round of bailouts has obscured a more fundamental problem: how to better encourage further savings and investment in the economy's entrepreneurial, innovative, knowledge sectors—away from the trillions in synthetic securities, derivatives, and other engines of speculative finance that mostly wind up lining the pockets of predatory middlemen.
"Our economic system needs to stop channeling funds into super-risky, highly leveraged, and speculative areas," writes Richard Florida in The Great Reset: How New Ways of Living and Working Drive Post-Crash Prosperity. "Instead we must return to the original vision and purpose of the financial markets: supporting innovation and the growth of the real economy," adds Florida, director of the Martin Prosperity Institute at the University of Toronto's Rotman School of Business.
One way to accomplish this basic shift in purpose is to encourage angel investors. These are mostly entrepreneurs and former entrepreneurs who invest in bootstrap companies too young and raw to attract attention and money from professional venture capitalists. Unlike venture capitalists that manage funds of money raised largely from such institutional investors as pension funds, angels risk their own money.
Angels are in the vanguard of financing entrepreneurship and innovation and when an investment pays off, venture capitalists come in to further build up the company. Angels fund real companies. They don't create collateralized debt obligations. (Some would argue that those complex financial instruments were the handiwork of the angels' opposite numbers.)
A number of well-known companies got their start with angel money. An Intel (INTC) executive and shareholder put $91,000 in seed money into fledgling Apple (AAPL). A dozen angels invested $1.2 million into Amazon.com (AMZN) after founder Jeff Bezos was turned down by venture funds. Perhaps the most famous angel stake in recent years was the $100,000 that Sun Microsystems founder Andrew Bechtolsheim invested in Google (GOOG). The money let founders Larry Page and Sergey Brin move out of their Stanford University dorm rooms and market their search engine product. Many of Google's newly minted millionaires are now trying their hands at angel investing.
"It's entrepreneurs looking to play with house money, make some more money, and help out other entrepreneurs," says Gary Smaby, a Minneapolis-based venture capitalist and sometime angel.
Post a comment about this story in Reader Discussion…
Track and share business topics across the Web.
RSS Feed: Most Read Stories
RSS Feed: Most E-mailed Stories
RSS Feed: Most Discussed Stories
About Advertising EDGE Programs Reprints Terms of Use Disclaimer Privacy Notice Ethics Code Contact Us Site Map Press Room
©2010 Bloomberg L.P. All Rights Reserved.
Read Full Article »