There are other ways to generate a return on capital—and help move the economic recovery.
Over the past 24 months It is well known that America’s largest companies have been stockpiling cash over at alarming rates. It has been estimated from $1.5 trillion to $2.8 trillion. And at first blush, who can blame them? With interest rates at historic lows, market volatility, political uncertainty, the European crisis, severe commodity price fluctuations, and other unpredictable market conditions, corporate brands and executives have been understandably inclined to sit on the sidelines.
But history shows that cash cannot sit idle indefinitely. The returns provided by many market fund rates or treasury bills cannot yield sustainable strategic value to a company and its stakeholders. To drive shareholder value and be a catalyst for economic recovery, our nation’s largest companies must deploy their assets in a productive manner, either internally for innovation and organic growth, or externally for corporate venture capital investments, research partnerships, joint ventures and alliances, or acquisitions. The cash must be put to work in some fashion.
While market conditions are still too blurry for many to actually spend the money, let me suggest that there are other ways to generate a return on this capital—and help move the economic recovery needle by doing so.
Even as the large companies are hoarding cash, many small and mid-sized enterprises are still facing significant challenges and hurdles gaining access to the credit markets. Loans to these companies would help chip away at our alarming unemployment rates—and even more troubling underemployment rates—as well as knock down some of the hurdles that these firms face in executing on their business and growth plans.
The challenge for these emerging growth companies is twofold. First, credit standards and lending rates make it generally difficult to access otherwise very attractive capital available at low interest rates. Second, for small and rapid-growth technology companies, the problem is compounded by the fact that, while rich in intangible assets, they typically lack the kind of collateral (equipment, inventory, real estate, etc.) banks require to secure commercial loans.
What if the idle cash sitting in the treasury accounts of our largest companies could be used as collateral to secure these loans? For years, entrepreneurs lucky enough to have a wealthy Uncle Harry or Aunt Sue have used third-party guaranties and third-party asset pledges to bridge the collateral gap. A private-sector-driven “Uncle Harry” could fill in where the SBA Loan Guaranty program falls short, and shift some of the burden away from the public sector and taxpayers to ensure that rapid-growth enterprises have access to the capital needed to fuel growth.
Apparently we cannot count on traditional sources such as venture capitalists, angel investors, and private equity firms to do this. They have also been slow to step up the pace of investment, as the number and size of firms continue to shrink and the number of total dollars and deals involving these sources and RGEs has dropped significantly since 2007. The JOBS Act allowing some degree of equity-driven crowdfunding may help chip away at this problem, but we await the regulations to guide us through the details.
This idea is more fully explored in a white paper [pdf] I recently authored, the product of a study by the TechAmerica Foundation. It explains how private-sector initiatives such as PEPP (the Private Employment Partners Program developed by Lynn Sullivan and her team at Capital J Partners) can help overcome this credit crunch for rapid-growth enterprises. Essentially, if we created a private-sector stimulus by tapping the idle cash reserves of large companies, thousands of small businesses would gain access to the credit they urgently need.
Standard methodologies and ranking systems would need to be developed to lower the risk of loans backed by intangible assets, but this is a manageable challenge. We are seeing safeguards and screening systems to mitigate default rates being developed by PEPP and Boefly.
These sources of capital seem untraditional, but the current state of America’s credit crunch remains bleak and demands new thinking. In his New York Times Dealbook column, Andrew Ross Sorkin recently offered acquisition suggestions to Apple as ways to deploy its accumulated cash, now topping $117 billion. If it could think more broadly than acquiring companies; Apple could use a portion of its capital to provide loan guarantees for small tech-startup businesses. That would foster job creation, innovation, and growth simultaneously.
It is my hope and prayer that we will soon see these types of credit solutions brought to market in an attempt to spur growth among our nation’s most promising enterprises. Apple isn’t the only company sitting on uncommitted investment capital. There is a tremendous amount of it in the economy, and it represents enormous potential for creating a virtuous cycle of growth, partnership, and co-innovation between companies large and small, leading to a stronger, faster-growing economy in the long run.
Traditionally, the United States has been home to some of the world’s most innovative high-tech start-up companies, but this advantage is in jeopardy if its most promising companies cannot access affordable credit. We cannot rely on public sector solutions exclusively or indefinitely. Without pragmatic solutions such as leveraging idle capital, our country’s job market and overall economy will continue to struggle.