Why Is DEED Trying To Put Minnesota’s Tech Entrepreneurs Into Debt?

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Minnesota’s Department of Employment and Economic Development aka DEED recently launched a new debt financing program targeting local early stage tech entrepreneurs called Minnesota Innovation Loans for Entrepreneurs (MILE).

“We want to encourage the development of tech in Minnesota and want to provide opportunities for entrepreneurs to commercialize technology that they have developed or licensed here,” says agency spokesperson Shane Delaney about the initiative.

Which makes surface ense, given DEED’s mandates, though one can’t help but speak up at the notion that the State’s top economic developer is actually encouraging and incentivizing early stage entrepreneurs to go into debt!?

Delaney continues, “MILE debt is non-dilutive, so should the business have any equity investors, it is not reducing their ownership interest in the business. Compared to regular loans, MILE loans are start-up friendly as 1) there is no repayment in the first year, 2) repayment amounts in years 2-4 graduate upward in amount, thus giving the business more time to get established and/or find additional funding so that repayment is easier, and 3) we don’t charge any interest.”

And while that may be true relative to the typical lending options, the logic is akin to saying ‘this drug is not as bad as that drug’.

There may be a time and place within a certain business context, such a mature enterprise with tangible collateral assets and past + predictable future revenue, but debt is totally is the enemy of entrepreneurship because it can put the owners in a bind to repay prior to potential IP creation, product-market fit, paying customers, cash flow, and subsequent profit margins necessary afford such repayment.

Debt hardly a “startup friendly” financing tool and the worst business phase for entrepreneurs to become indebted.

MILE is like that interest free/deferred payment toxic mortgage loan that the banks (using government deregulation) peddled for years which created the temporary and false illusion that it would just pay for itself in time via leveraged appreciation gains. 

And to think, we’re not even talking about actual physical land assets and structural improvements, both of which carry inherent value, but rather a technology company that statistically faces a 90%+ chance of going bust within the first few years.  Nothing is more burdensome to the entrepreneur or their business, especially a startup/early stage technology company than a debt, no matter how much “better” MILE is vs. the alternative loans.

Furthermore, because requires a 1:1 match, that means that the entrepreneur must simultaneously obtain additional “more burdensome” debt of equal/greater amount to get MILE at all.

Fortunately, DEED will be hard pressed to find an early stage tech entrepreneur who will see this tool as being in their best long term interest and also quality based on the match requirement; it’s incredibly difficult (for good reason) for tech entrepreneurs to get business debt financing without proper qualifications in the first place. Unless of course, they’re going to put some major personal collateral on the line (house anyone?) which is the only thing a true startup may have to offer as in a secured personal guarantee.  Yikes!

So stop incentivizing early stage tech entrepreneurs into assuming debt – this is merely an opportunity for disaster, not even considering the potential loss of taxpayer money in the process. 

If DEED really wanted to encourage and support Minnesota’s tech entrepreneurs they’d simply tax them less on the fruits of their labors, thus allowing them to retain a higher percentage of their earnings. What State sponsored program could possibly be more supportive of the entrepreneurs than that? 

Comments

  • http://thebigidea.com/ TheLittleDuke

    I’ll take the MILE program over that wealth transfer system known as the “Angel Tax Credit” any day!

    What DEED could be doing with it is structuring the program as a convertible note and actually INVESTING in MN businesses. Create a mutual fund as it were and reinvest any profits back into the system.

    Those arguments about dilution are red herrings. What startups need is SEED FUNDING and because there is so much “crib death” it is nonsensical to worry about what “fancy rich people are going to think about your choices in the future.” Nearly every financing event can be structured in a Special Purpose Vehicle and managing a cap table comes down to managing VOTING RIGHTS. Trivial to do with something like a blockchain based distributed ledger paired with a mobile app.

    If venture financing actually existed you’d see more flows at early stages. There is nothing more disingenuous than hearing someone say “come back to me when you need $10M or $100M” that’s pure bullshit in an era of automation. If someone can’t staff up to manage their investments it’s likely all a pure vanity play. The unthinking brute force deployment of increasingly larger amounts of capital in pursuit of unicorn droppings is a gamblers game.

    Before throwing the MILE option under bus, go talk to someone who has suffered through the alternatives such as the SBA process. I have and everyone I have talked to who has would rather chew on tinfoil for the rest of our lives.

  • Grady

    MILE is a good thing. Dilution is real, and this is an exciting direction for the state to take to support entrepreneurs. Debt instruments are exactly what funds early-stage companies, only this debt doesn’t dilute you. BRILLIANT!

    • RED94160

      The best entrepreneurs support themselves!

      • Grady

        This statement makes no sense. The best entrepreneurs ethically create value for themselves their employees and share holders.

  • Robert Kohns

    Totally agreed. How about DEED grant tax credits of $5,000 per year for up to three years for each employee (living wage jobs) created in targeted industries. This seems a lot more productive than gifting corporate America $10,000 per job to established industry tycoons.

    Additionally, get off the idea of tribalism. We are all individuals and NOT part of some group. Government incentivizing people to think that my tribe (protected class) is DUE something and the other tribes MUST pay for it has NOTHING to do with capitalism, business development, self determination and entrepreneurship.

    Destructive creation is challenging for government types to embrace let alone fund. “Survival of the fittest” necessitates education/retraining of the displaced, more of a government role.

    Infant industries should be fostered by government policy. That has to be targeted which I do feel DEED has done a reasonable job in over the last 30 years. Remember Mark Dayton use to run DEED and didn’t go crazy for the Amazon HQ2 deal. He is, however, aggressively pursuing the Army command which the TECH industry should support as well.

    • Frank Jaskulke

      Hi Robert,

      DEED does have grant and loan programs that give money per job created – open to all industries and locations. It does have certain restrictions but generlly similar to what you describe. Look up the Job Creation Fund and Minnesota investment Fund.

  • http://about.me/chuckumentary Chuckumentary

    My interest in MILE was immediately piqued upon learning Jeff Pesek hates it. :-D

    I think it’s potentially good & useful for a company at my stage – but requiring the match is stupid. The time/red tape investment alone scares me away. I’ll be spending my time earning new customers instead.

    • Grady

      No the match makes perfect sense, it raises the bar. If you’re planning to raise anyway it’s an opportunity to raise more without further dilution.

    • Frank Jaskulke

      Re: red tape: The folks who manage the program do really good work. Same group on the angel credit.

      Re: Match: generally those have been required so that the company has to prove someone else cares before public dollars come in.

      not saying I agree/disagree with the rationale, just sharing.

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