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?