Financial Bailout as a VC Pitch

Suspend your imagination for a moment and imagine that Treasure Secretary Paulson is a one time successful entrepreneur who is coming to a VC looking to raise money for his next venture.  Perhaps that conversation would go something like this:

Paulson: So, I’m here to raise $700 billion dollars for my new venture.  I see a unique opportunity in the marketplace of which I want to take advantage.  I have built out the business plan, and am here to raise some money.

VC: OK.  So what’s the idea?

Paulson: I want to invest in some mortgages.

VC: Interesting.  And how do you plan to make money?

Paulson: Didn’t I cover this already?  I have a business plan.

VC: But we haven’t seen the business plan.

Paulson: And you won’t.

VC: I see.  Do you need all this money at once?

Paulson: Not really.

VC: Why are you asking for it all then?

Paulson: These are uncertain times, and I need to give the appearance that I have money.

VC: Oh, I see.  Do you have a plan for how you are going to use the money?

Paulson: Yes, I plan to make money with it.

VC: And what do I get for my money?

Paulson: <irritated> Business plan…

VC: What I meant to ask was whether I will get equity in this business?

Paulson: No.

VC: No upside for my money.

Paulson: Yeah, not really.

VC: Interesting.  Do I get a board seat?

Paulson: No.

VC: Any controls?

Paulson: Nope.

VC: No oversight?

Paulson: None.  Oh, and you have 2 days to make your decision.

VC: Well, that’s quite a bit of money, and not a lot of time.  Are you speaking with other investors?

Paulson: Nope.  You guys are the only game in town, but if you don’t invest now, you won’t see this opportunity again.  I will walk right out the door.

VC: And go where exactly?

Paulson: The door probably leads outside, no?  Listen, you look like a nice guy.  Let me share a little bit of my business plan with you.

VC: That’s pretty optimistic.  How accurate and or robust is your model?

Paulson: I can tell you this much…it’s better than the ones used to value the mortgages in the first place.  We actually handle a 10 sigma event.  We even went so far as to model an 11 sigma event, but that won’t ever happen. 

Of course, I say all this with my tongue placed firmly in cheek, but I have to say, I am pretty surprised at the evolution of this package and the discussion around it.  I want to be very clear on my economic viewpoint: liquidity and credit availability in the market are absolutely critical right now.  However, if the American public is going to take on the role of investor, there should be a well thought out plan, controls, and upside participation.  Huge risk with little upside is hardly a good investment.  Why is it that Warren Buffett is the only investor who can negotiate a great deal?  The bailout package is being sponsored by an entity with vastly more money in their coffers than Mr. Buffett.  It’s a funny thing, the way deal making is supposed to work – when you have the money, and the other person needs the money, and they need it very badly, you are generally in the better position.