Monday, August 10, 2009
In Democratic America, risk is a four letter word
Our nimble and transforming venture capital sector, which has already been weakened by the last decade's suffocating regulation of public companies (which discourages or even eliminates the most likely exit for successful venture-backed firms), is now a target of new regulation in a misguided effort to abolish "systemic" risk.
Just when the economy needs risk-taking the most, risk-takers are under the most threat. The Treasury now wants venture-capital firms declared as systemic risks and put under tight restrictions as part of the broader re-regulation of financial firms. Venture capitalists argue that since they don’t use debt and their firms are comparatively small, they shouldn’t come under rules designed for highly leveraged, too-big-to-fail banks.
How this debate turns out matters, because some 20% of U.S. gross national product is created by companies that were formed through venture backing. They include Intel, Apple and Google. How policy makers treat venture capital is a measure of the amount of innovation and enterprise that happens in an economy, with more regulation leading to less innovation.
This is a tough time for venture capital, with investments by firms falling more than 50% in the second quarter. The 700 or so venture-capital firms in the U.S. are mostly small partnerships, with a modest voice in Washington. They say the industry as we know it can’t survive if firms are regulated as investment advisers, which would mean complying with rules for disclosure, compliance, record keeping and privacy designed for huge firms.
This is a good time to recall that the venture-capital industry was born as a reaction to New Deal regulations that stifled capital and prolonged the Depression. The country’s first venture-capital firm (other than family-run funds) was American Research and Development, planned in the 1930s and launched after World War II in Boston.
Venture capitalists do not leverage their bets in any way that creates too-big-to-fail risk, and in fact expect to lose money on many deals knowing that a big win will generate massive returns. Venture capital firms were not responsible for the current problems in any way, shape, or form, and, if left alone, will make an outsized contribution to the economic growth that we will desperately need over the next generation. It is hard to see why anybody would want to regulate venture capital other than out of neurotic fear that some business, somewhere, might have escaped the federal government's regulatory dragnet. Of course, it is increasingly apparent that Washington's present governing elites are widely possessed of just such fears.
7 Comments:
By 
, at
Mon Aug 10, 11:31:00 AM:
oh, and have you been paying attention to the house hearings on medical device regulations...?
Maybe you should. Likes like the trial lawyers are gonna run wild with this......
By 
MartyH, at
Mon Aug 10, 11:41:00 AM:
We're burning the bridge to health care choice and eating the seed corn of innovation. The 21st Century is already a cliche.
By , at
Mon Aug 10, 01:19:00 PM:
By PD Quig, at
Tue Aug 11, 12:02:00 AM:
"This is a good time to recall that the venture-capital industry..." voted overwhelmingly for the anti-capitalist jagoff now running the show.
I work for a small software startup in Silicon Valley, and I can still recall the laughter and gloating echoing through the hall of our CEO and several of our board members yukking it up on Nov. 5, 2008. They were SO VERY smug and satisfied that the "old fart rightwinger" McCain had been dispatched by the glib, hip, young moderate.
This crew was totally duped. They showed a remarkable incuriosity and behaved more like star-f*cking teenage girls than sober business people. I am enjoying tremendously their growing angst over Zerobama's exploits. I'm a year from retirement while they have decades to go. Their silly laughter still echoes through my memory. This kind of regulation would serve them right.
By JPMcT, at
Tue Aug 11, 06:52:00 AM:
One of the nurses at the hospital has an Obama calendar in her office. The picture for August shows him talking on his Blackberry with the caption in the background "Justice for the Middle Class and the Poor".
I guess the rest of us can go to hell!
No guts...No glory. Somebody has to bring the bat and the ball to the game.
By , at
Tue Aug 11, 12:22:00 PM:
Democrats in Washington are driven by fear, not hope. Apparently they fear business suits most of all.
By , at
Tue Aug 11, 03:58:00 PM:
Washington communists and democrats HATE venture capitalists and will do almost anything to destroy them. They believe that VCs are irrationally rewarded by the efforts of others in a matter of luck not skill. Gambling is OK where the state gets the house edge. VC is gambling where the VC gets rewarded far more than the entrepreneur in a success. Sure, the state can tax the heck out of those rewards but, then, the VC will not again invest, at least in this country.
Of course, another reason is that every dollar spent by a VC on a new business concept is a dollar not being paid to a friend or relative of a congressperson as a bribe.
