Washington Versus Silicon Valley(online.wsj.com)
online.wsj.com
Washington Versus Silicon Valley
http://online.wsj.com/article/SB10001424052970204313604574328621808977640.html
46 comments
"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."
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!
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!
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.
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.
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.
But the institutions that invest in them do.
And many people who have physical dollars also have credit card debt. Should we force dollars to follow the same rules?
Your comparison is absurd. You're making the case for regulating the same amount of leverage twice -- once when it's borrowed, and once when it's invested. That doesn't do anything but make life inconvenient for the folks who don't lever up.
Your comparison is absurd. You're making the case for regulating the same amount of leverage twice -- once when it's borrowed, and once when it's invested. That doesn't do anything but make life inconvenient for the folks who don't lever up.
The issue is that the investors are overwhelmingly public and corporate pension funds, endowments, fund-of-funds, etc.
Then it is the public and corporate pension funds, endowments, fund-of-funds, etc., that should face scrutiny, not the venture capital firms. Figuring out their expected return from their venture capital investments shouldn't be very difficult because of how long the industry has been around, not to mention that venture capital investments on average are only 1-3% of their portfolios (due to venture capital's lack of liquidity), so the amount of money at risk is insignificant compared to the size of the portfolio. If losing 1-3% will collapse an investors fund, then they were over-leveraged to begin with, just like Lehman Brothers.
If the Treasury Department is worried about how much people are putting into venture capital, then they should make a ceiling of 1-3% of the fund's portfolio being able to be invested in venture capital. No regulations are needed on venture capital firms.
If the Treasury Department is worried about how much people are putting into venture capital, then they should make a ceiling of 1-3% of the fund's portfolio being able to be invested in venture capital. No regulations are needed on venture capital firms.
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.
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?
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?
Austria for example, and Germany. They have social services that are built in and aren't nearly as bloated as the US government.
However I don't agree with that analogy in this day and age where countries offer services countries should be seen as corporate entities.
However I don't agree with that analogy in this day and age where countries offer services countries should be seen as corporate entities.
The subject of the OP is the climate for startups, and it is almost certain that the climate for startups is better in the U.S. than it is in Germany or Austria.
Off-topic, but I recently considered relocating to Germany, and here is a brief synopsis of the main considerations.
I saw figures on the web once saying that in the U.S. government (Federal, state and local) takes about 40% of the income of individuals and in Germany government takes about 50%. Take the figures with a grain of salt because I do not recall where I saw them or who compiled them.
Homeschooling is illegal in Germany, and the law against homeschooling is enforced, making it very difficult to raise children there without sending your children to government schools or to private schools heavily regulated by the government. For example, it is illegal for private schools to pay their teachers less than the pay of teachers in government schools. The result of the heavy regulation of private schools is that almost everyone sends their children to government schools.
It is easier for men to get laid in Germany than in the U.S. I cannot tell you why, but several sources have said so, including a French manufacturer of sex dolls (high-end ones costing thousands each) who said that his company's dolls sell much better in Japan and the U.S. than they do in Europe. His exact words were, "Sex is easier in Europe, but taxes are harder." So if you are a heterosexual man having trouble getting laid in the U.S., moving to France or Germany might solve the problem.
Off-topic, but I recently considered relocating to Germany, and here is a brief synopsis of the main considerations.
I saw figures on the web once saying that in the U.S. government (Federal, state and local) takes about 40% of the income of individuals and in Germany government takes about 50%. Take the figures with a grain of salt because I do not recall where I saw them or who compiled them.
Homeschooling is illegal in Germany, and the law against homeschooling is enforced, making it very difficult to raise children there without sending your children to government schools or to private schools heavily regulated by the government. For example, it is illegal for private schools to pay their teachers less than the pay of teachers in government schools. The result of the heavy regulation of private schools is that almost everyone sends their children to government schools.
It is easier for men to get laid in Germany than in the U.S. I cannot tell you why, but several sources have said so, including a French manufacturer of sex dolls (high-end ones costing thousands each) who said that his company's dolls sell much better in Japan and the U.S. than they do in Europe. His exact words were, "Sex is easier in Europe, but taxes are harder." So if you are a heterosexual man having trouble getting laid in the U.S., moving to France or Germany might solve the problem.
There are still a few differences. Countries are bounded by geography, but corporations can be in multiple countries. Also, people are born citizens of a country, but they aren't born customers or employees of a corporation. Countries, for its citizens, are monopolies in the governmental services they provide. It's hard to avoid paying taxes, but easy to avoid being a customer.
But I see your point.
But I see your point.
Not exactly, there's private healthcare in Canada, and in France, but the government provides free Healthcare. So they don't hold a monopoly unless it's legally enforced.
Do they refund your taxes if you decline to use government services? If not, it's the best kind of monopoly since they still get paid even if they don't provide the products or services...
Also, in 6 out of 10 Canadian provinces, it is illegal to enter into a contract for health services that are publicly funded. (http://www.cmaj.ca/cgi/reprint/164/6/825) Still not a monopoly?
Also, in 6 out of 10 Canadian provinces, it is illegal to enter into a contract for health services that are publicly funded. (http://www.cmaj.ca/cgi/reprint/164/6/825) Still not a monopoly?
This may be true. But France also has public schooling that is a mess. They have incredibly powerful teacher unions that rape the state budget. Since it is such a large amount of people, they have an incredible amount of political clout. France gets a lot less bang for buck education wise for the amount spent on education.
It will also be interesting to compare the average remuneration for doctors in France and Canada when compared to other countries. I am not saying that the American system is not broken – but France and Canada’s health system isn’t the model to follow.
For interest sake, Canada imports a hell of a lot of doctors. They simply do not train enough doctors to be self sufficient and must rely on the brain drain from 3rd world countries for their staff. (In the province of Saschatewan, more than 50% of doctors are from abroad – most prominently from South Africa).
The amount spend on medical research in Canada is also a lot lower (per capita) than the USA.
It will also be interesting to compare the average remuneration for doctors in France and Canada when compared to other countries. I am not saying that the American system is not broken – but France and Canada’s health system isn’t the model to follow.
For interest sake, Canada imports a hell of a lot of doctors. They simply do not train enough doctors to be self sufficient and must rely on the brain drain from 3rd world countries for their staff. (In the province of Saschatewan, more than 50% of doctors are from abroad – most prominently from South Africa).
The amount spend on medical research in Canada is also a lot lower (per capita) than the USA.
Well said, however no government is perfect. That being said....
The US has incredibly powerful teachers unions as well. The teacher's union is so powerful it's still technically on the Homeland Security list of terrorist organizations.
Yet we don't have healthcare.
Not only that there's a reason why IT and (real) Doctors aren't the most popular jobs (or majors) unlike Business and Psychology, it's because they're the #2 and #1 (respectively) most stressful occupations according to Forbes.
The US has incredibly powerful teachers unions as well. The teacher's union is so powerful it's still technically on the Homeland Security list of terrorist organizations.
Yet we don't have healthcare.
Not only that there's a reason why IT and (real) Doctors aren't the most popular jobs (or majors) unlike Business and Psychology, it's because they're the #2 and #1 (respectively) most stressful occupations according to Forbes.
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> Austria for example, and Germany. They have social services that are built in and aren't nearly as bloated as the US government.
It depends on your definition of bloat. They do consume comparable amounts of GDP and they don't do some things that the US govt does.
However, there's an even bigger difference - both are tiny by comparision to the US govt. Germany would be a big state and Austria a middle-size one.
It depends on your definition of bloat. They do consume comparable amounts of GDP and they don't do some things that the US govt does.
However, there's an even bigger difference - both are tiny by comparision to the US govt. Germany would be a big state and Austria a middle-size one.
> Austria for example, and Germany. They have social services that are built in and aren't nearly as bloated as the US government.
And, they're about as diverse as Minnesota.
And, they're about as diverse as Minnesota.
There's New Zealand if you want more diversity.
78% European is diverse?
http://en.wikipedia.org/wiki/New_Zealand#Demography
And, we're talking about less than 4.5m people.
Compare it with http://en.wikipedia.org/wiki/Demographics_of_Chicago , which has more people than live in all of New Zealand's 4 largest cities and has almost as many people as NZ's 16 main urban areas. And, that's not counting Chicago's suburbs.
Chicago is only moderately diverse for a large American city - there are less than 50 languages spoken by more than 1000 people.
See http://en.wikipedia.org/wiki/Demographics_of_Los_Angeles for diversity (which has more people than all of new zealand's major urban areas, and I'm still ignoring suburbs and other major adjoining cities.)
http://en.wikipedia.org/wiki/New_Zealand#Demography
And, we're talking about less than 4.5m people.
Compare it with http://en.wikipedia.org/wiki/Demographics_of_Chicago , which has more people than live in all of New Zealand's 4 largest cities and has almost as many people as NZ's 16 main urban areas. And, that's not counting Chicago's suburbs.
Chicago is only moderately diverse for a large American city - there are less than 50 languages spoken by more than 1000 people.
See http://en.wikipedia.org/wiki/Demographics_of_Los_Angeles for diversity (which has more people than all of new zealand's major urban areas, and I'm still ignoring suburbs and other major adjoining cities.)
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.?
Oh, the other Washington.
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.
Please make it more clear, since this is a great article that everyone should read.
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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.
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.
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.
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.
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.
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.
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.
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.
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).
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).
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?
How does this work? Isn't there a clear distinction between hedge funds and venture funds?
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.
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.
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.
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.
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.
> I was under the impression that lack of regulation is what caused many of these mega banks to collapse.
You may be under that impression, but it's wrong. (It's being pushed by folks who like regulation.)
They were all regulated to the hilt. AIG especially.
You may be under that impression, but it's wrong. (It's being pushed by folks who like regulation.)
They were all regulated to the hilt. AIG especially.
Well, obviously mismanagement, greed, and stupidity caused them to collapse, but regulations forbade even the formation of such multi-national investment house+bank combinations in the past. I assume that the hope was that it would prevent banks from taking unnecessary risks with people's money. Which was obviously reversed with a good old, "private industry always comes up with the most efficient model, never fails, never commits fraud, and is always perfect" crap that like to get pushed around in government.
> Which was obviously reversed with a good old, "private industry always comes up with the most efficient model, never fails, never commits fraud, and is always perfect" crap that like to get pushed around in government.
The only folks who ever say that do so as above, attributing that belief to others in an attempt to cover up their lack of an actual argument.
Govt is subject to exactly the same failings, with one important difference - it gets to tax and coerce folks and there's even less connection to results.
Even the most corrupt company would have problems keeping Barney Frank around, yet he's still a major player in govt, driving housing policy....
The only folks who ever say that do so as above, attributing that belief to others in an attempt to cover up their lack of an actual argument.
Govt is subject to exactly the same failings, with one important difference - it gets to tax and coerce folks and there's even less connection to results.
Even the most corrupt company would have problems keeping Barney Frank around, yet he's still a major player in govt, driving housing policy....
> I assume that the hope
Such a firm connection to reality.
How about the reality that regulation caused a lot of the problems?
Start with Fannie Mae and Freddie Mac. Ask whether anyone would be willing to make NINJa loans without a govt guarantee. And, if someone made such loans, ask whether anyone would buy them.
US Govt policy pretty much guaranteed that the mortage industry would take a huge fall. Even now, it's trying to keep people in houses that they can't afford. And, the money is coming from folks who bought what they could afford or rented because they couldn't afford to buy.
Such a firm connection to reality.
How about the reality that regulation caused a lot of the problems?
Start with Fannie Mae and Freddie Mac. Ask whether anyone would be willing to make NINJa loans without a govt guarantee. And, if someone made such loans, ask whether anyone would buy them.
US Govt policy pretty much guaranteed that the mortage industry would take a huge fall. Even now, it's trying to keep people in houses that they can't afford. And, the money is coming from folks who bought what they could afford or rented because they couldn't afford to buy.
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cough---LTCM---cough
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...
http://www.nuclearphynance.com/Show%20Post.aspx?PostIDKey=13...
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?
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?
Suits go out and owe money all over town and the government pees on our rug?
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.