Washington Versus Silicon Valley

http://online.wsj.com/article/SB10001424052970204313604574328621808977640.html

by jsyedidia • 17 years ago

55 43 17 years ago

online.wsj.com

pj3• 17 years ago

OMG, this is the most absurd thing I've heard in a long time.

I think it's really a symptom of a much deeper problem with American government and that is that the "system" is getting so big that no one really knows how to fix it. I see this kind of thing happen with software too. Your IT department buys software or adopts a new platform and builds all these great interconnected applications with messaging busses and information silos and then one day everyone who knows anything about the system is gone and what to do now?

Well, you start building systems on the platforms that are easier to understand and try to work around problems and in the meantime, the people who don't know what to do are trying to keep their jobs by doing something at all which is just making the whole package even worse!

At some point, a company has to make a very tough decision to "rip and replace." It's costly. It takes time. And while you are ripping and replacing you have to try to do the best with what you have working now. But the consequences of not ripping and replacing are just going to continue crippling you and eventually, you are going to be leap frogged by an agile startup who doesn't have the legacy deficit you've run up by not doing things right in the first place!

_pi4• 17 years ago

Except no one knows how to rip and replace in this case. There are governments out there that are less complicated but offer more to their constituents than the US government does. And no one in the US government wants to give up power or funding.

pj3• 17 years ago

As an analogy, corporations are to countries as stock is to currency. So, if that is the case, perhaps we can help understand what is going to happen in the US by examining what has happened to companies in similar situations.

What are some examples of the governments that are simpler and better?

If no one wants to give up their power, what is going to happen? Revolution? Civil war? Domination by another power somewhere else?

ricaurte2• 17 years ago

Agreed this is a completely absurd move by the Treasury Department. What brought the financial industry to its knees was too much leverage. Venture capital firms don't use leverage, so they can't be a systemic risk.

joubert3• 17 years ago

But the institutions that invest in them do.

feverishaaron• 17 years ago

Another problem is that the majority of policy makers don't have a business background (most are analysts, lawyers or career politicians), and thus don't have that unique entrepreneurial experience required to fully grasp the impact of their policies on new high-growth businesses.

I would bet that many politicians in Congress or the Treasury couldn't tell you how a VC firm operates, let alone how their actions would affect future new-technology incubation and growth. If this wasn't the case, SOX would never have passed in its current form.

In short, we have too many "Nancy Pelosis" and "Timothy Geitners" with not enough "Jared Polises" in Congress today.

joubert3• 17 years ago

That's quite rich. Don't VC's receive most of their money from institutional investors, like, uhm, public pension funds, corporate pension funds, insurance companies, endowments, foundations, fund-of-funds, etc.?

bokchoi• 17 years ago

Oh, the other Washington.

rottencupcakes• 17 years ago

Misleading title. I assumed this article was about if Seattle or the Bay was better.

Please make it more clear, since this is a great article that everyone should read.

grellas2• 17 years ago

Politicians, lawyers, and regulators impeding entrepreneurs and investors in the name of protecting against non-existent systematic risks to our economy.

This type of regulation originated many years ago with the broad idea that unsophisticated persons (the "little guy") needed various forms of disclosure to enable them to make informed decisions about their investments. How that rationale can even begin to apply to VCs and their LPs (who are typically large institutional investors) is an absurdity only Washington could possibly begin to fathom.

The article nails it when viewing this development as a further extension of Sarbanes-Oxley and other recent regulatory changes: much more of this and it will be time to put the IPO on the endangered species list.

This will definitely hurt startups in the long run.

mediaman• 17 years ago

It's already pretty bad -- one firm I talked to was planning an IPO last October, which they pulled after the markets sank. Prior to pulling, they had to spend $2.5mm preparing for the IPO in legal and regulatory fees (not including bank's underwriting fees).

Think about what that means: for a firm worth $100mm, they would have to spend 2.5% of their net worth just paying lawyers and accountants to comply with regulations. Never mind the ongoing costs of SOX implementation after the IPO.

mixmax• 17 years ago

Without knowing anything about the mechanics of IPO's I'm sure there's a great opportunity for a startup with a heavy finance background. The amounts charged are absolutely absurd.

hristov2• 17 years ago

Non-existent systemic risks???? Did you suddenly forget about the last year. Have you been asleep for the last 18 months? Systemic risks are very much existent.

And if banks and financial institutions are going to cry for federal bailouts every time a "systemic risk" rears its ugly head, the only thing any responsible government official can do is put in regulation to make sure that the systemic risks are controlled.

The financial industry loves to complain about regulation but it is the financial industry that brought this on their own heads by (1) fuckign up, and (2) asking the taxpayer to pay for their fuckup.

As far as the rationale, it is different from what you said. The rationale is that certain parts of the economy are so intertwined that if one financial company craters it can cause a chain reaction disaster for multiple other completely healthy financial institutions. I am not sure I buy this logic, but again the financial industry used this very same logic to say it was not their fault when the economy imploded, so it is only fair that the same thinking should be applied to them now that the feds are starting to regulate them.

Now you could make somewhat of an argument that VCs are not systemic risks, and that may be true if they were mostly owned by wealthy individuals, but that's not the case. VCs are mostly owned by financial institutions that may borrow against their property, so if the value of a VC craters they may cause a sell off spiral in a larger financial institution. Again, I am not I believe the above sentence, but if you buy into the theory of systemic risks, it is pretty obvious that VCs are one.

bhewes• 17 years ago

Systemic risk is a risk that can cause the financial industry to collapse. VCs are not a systemic risk they are only $28 billion in size, are positively exposed to extreme market moves and are not leveraged. With a VC investment the most you lose is your initial investment. With any form of leverage you can possible lose more then your actual investment and are negatively exposed to extreme moves in the market. If a VC's principles are leveraged up that still does not change the systemic risk exposure of the VC fund. The institutional investor is the one carrying the systemic risk.

grellas2• 17 years ago

I meant only with respect to VCs, as to which I believe there is no credible argument to be made about their failure potentially triggering any form of systematic financial crisis.

The rest of the whole sorry mess has been a disaster, one initially triggered by the bogus subprime paper generated through the Fannie/Freddie programs, and it is in that direction that regulators should focus their efforts, not on an an industry that had nothing whatever to do with this fiasco (a point also made in passing by the author of this article).

matt1• 17 years ago

From the article: Treasury’s position is that if it doesn’t drag VC firms into the bureaucratic swamp, then high-rolling hedge funds playing with borrowed money will present themselves as venture funds to avoid regulation.

How does this work? Isn't there a clear distinction between hedge funds and venture funds?

tjic• 17 years ago

I note that the relatively little regulated hedge funds did NOT collapse and need a taxpayer bailout in the current recession.

Folks like to trot out hedge funds as bad guys, but in fact they do a ton of good, and prove that a lightly regulated environment works as well (or much better) than operating with the government's hands all over them.

pyre2• 17 years ago

I was under the impression that lack of regulation is what caused many of these mega banks to collapse. Mostly because the regulations preventing banks from merging with investment firms and such were lifted in the 80's or 90's. I'm not necessarily saying that regulation is a good thing, though. Just that there is a balance to be struck.

hristov2• 17 years ago

Where did you get that? Multiple hedge funds collapsed. Their collapses weren't as public because hedgefunds tend to be very secretive but many, actually most of them closed their doors.

Also, hedgefunds like banks were the main cause of the meltdown because they were so leveraged when the market prices of their assets decreased even slightly they had to sell large chunks of their assets to cover their losses, which caused further decrease in prices, which caused further sales, which caused the death spiral of the entire economy.

Again the banks were more vocally criticized for this than the hedgefunds because the banks are insured by the federal government, but the hedgefunds were doing it just the same, and they are just as much to blame.

The only thing that you said that is true is that the hedge funds did not really take tax payer money. That is true because they had absolutely no possible argument to ask for taxpayer money. The federal government was already on the hook for the banks because it ensured them.

Virax• 17 years ago

cough---LTCM---cough

TriinT• 17 years ago

Many hedge funds did indeed collapse. Their fall was not as loud as the fall of the Wall Street banks because the hedge funds at least had the decency not to ask for bailouts. More info at:

http://www.nuclearphynance.com/Show%20Post.aspx?PostIDKey=13...

tici_88• 17 years ago

While this regulation will clearly be disastrous for America, can you imagine the windfall of campaign contributions and lobbying frenzy that will ensue as a result of this thing passing?

Timothy Geithner or whoever is crafting this proposal is probably licking his/her lips at the thought of a $200bln industry on their knees willing to write a check to anyone who has the power to decide who are the winners and who are the losers in this regulation madness.

Administration: 1, Rest of America: 0

Could it be that the political system in Washington is corrupt beyond belief?

kirubakaran• 17 years ago

Suits go out and owe money all over town and the government pees on our rug?

catzaa2• 17 years ago

I always wonder if the cost of complying with new regulations is contemplated. If I think of how long our family take just to do stupid and inane administrative tasks (VAT, Union payments, tax, unemployment insurance, etc…). All this administration is really hampering small businesses.

Why aren’t these regulations simplified? Why aren’t employees paid on a cost to company” basis and are responsible for their own administration (i.e. own union payments, own unemployment insurance, own health insurance, etc…).

Maybe it is just because I hate admin – but I doubt that admin should take up 40% of a small business owner’s time.

AndrewWarner• 17 years ago

"As part of their regulatory redesign, Team Obama and Congress still don’t have a plan for reforming the giant taxpayer-backed institutions like Fannie that caused the credit crisis. Yet they’re moving to rewrite the rules for investing in tiny technology companies that had nothing to do with the meltdown. Under the proposed rules, venture firms will be declared systemic risks until they can prove themselves innocent."

Washington Versus Silicon Valley

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