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Washington Is Killing Silicon Valley

81 points by prakash 18y ago

known 18y ago
I think companies that are willing to comply with http://en.wikipedia.org/wiki/Freedom_of_information_in_the_United_States http://en.wikipedia.org/wiki/Freedom_of_information_in_the_U... should be exempted from SOX so that they can raise funds through IPO.
tokenadult 18y ago
Voted up because the premise of the article is interesting. But I disagree with the statement that Sarbanes-Oxley is killing entrepreneurship, so I'd like to hear comments about that from the entrepreneurs here. I'm also not sure that it is a sign of failure that many start-ups sell themselves to an existing big company rather than doing an IPO. It seems to me (again I would like to hear from the entrepreneurs here about this) that the whole point of starting a start-up is to have FLEXIBILITY to decide later how to cash out the business. Some like to sell to one company, some like to sell shares to the public at large, and some stay closely held for a long time. To each their own, methinks.
- ohhmaagawd 18y ago
  I know a CEO of an Internet company that planned on doing an IPO in 2008. Of course the economy tanked so it's not happening. He told me that SOX required the company to have auditing/traceability and controls for everything. This meant they quit using any software as a service applications, they shut down IM, they have to keep track of everything on every machine, banned a whole list of applications that would interfere with SOX (iTunes, file sharing, and music app), etc. They had to hire lawyers, more accountants, consulting firms. He told me they were looking at > 10m to comply. And that doesn't count lost productivity of having to act like a draconian big ass company where they had to have design docs for everything they do, detailed project plans, get rid of the tools they use (as listed above), etc. In other words to go IPO now you give up agility, spend more money, and become less productive.
  - deleted 18y ago
    [deleted]
  - Retric 18y ago
    IPO's are for large profitable companies who want to add liquidity. There is a huge pool of companies and people that invest billions in companies without an IPO, but there is a lot of laws setup to protect small investors. Anyway, there is a lot of overhead to going public, but if you want liquidity without selling then you need transparency or some company's are going to do huge scams. PS: There are IM clients that large companies can use so clearly some of what he said was BS.
    - fallentimes 18y ago
      Well it used to be for raising large amounts of capital (even for unprofitable companies). This is apparently no longer the case.
    - coryrc 18y ago
      "but there is a lot of laws setup to protect small investors" Or to prevent them from investing in private companies without giving a piece to NY bankers? (Not implying you necessarily disagree) Cray started illegally with small investors who all ended up making a lot of money. In the Midwest too! Good thing Washington isn't allowing that to happen again.
  - puzzle-out 18y ago
    This is one of Malone's more polemical pieces, and I imagine here he is willing to sacrifice some local nuances to appeal to a wider, non-SV audience. I think his overall argument is correct - we would see more IPOs if SOX were abolished, or at least reformed. From an editorial perspective, I think he should have included the comments of a CEO ala ohhmaagawd - Malone is certainly networked enough to do so.
- Herring 18y ago
  But clearly something has changed. FTA: "According to the National Venture Capital Association, in all of 2008 there have been just six companies that have gone public. Compare that with 269 IPOs in 1999, 272 in 1996, and 365 in 1986." It's probably more complex than that, or he'd have hammered the point a lot more. I'd love to see a graph, for instance.
  - beastman82 18y ago
    I'm sure it went something like this: 1)Give the number from this economically disastrous year, 2)find the other years with the highest number of IPO's and list them. 3)Use this ridiculously skewed comparison to prove your point
    - ohhmaagawd 18y ago
      Take a look at the years since SOX was passed. IPOs have plummeted.
      - beastman82 18y ago
        I would love to, if WSJ provided the aforementioned graph.
        wavesplash 18y ago
        Not a graph, but here's a table of IPO data: http://bear.cba.ufl.edu/ritter/IPOs2008VC.pdf http://bear.cba.ufl.edu/ritter/IPOs2008VC.pdf
      - wavesplash 18y ago
        correlation != causation.
    - jerf 18y ago
      2008 wasn't economically "disastrous" until the very end. Up until October, it wasn't too dissimilar from 2007. http://lawprofessors.typepad.com/securities/2008/02/januarys-ipo-co.html http://lawprofessors.typepad.com/securities/2008/02/januarys... : "January [2008] was a slow month for IPOs, with only five that raised a total of $892 million. This compares with ten in January 2007 that raised a total of $2.25 billion." I quickly googled, and there's probably more to look at here, since either 5 of the 6 IPOs did it in January, or there's different counting methodology in action here. Still, it's down even in months that weren't bad. It's not just statistical gaming, even if that's in play. Asking what changed is still fair.
- russell 18y ago
  I worked for a company a couple of years ago that was planning to public in a year or two. The CEO told us that complying with SOX would cost $3 million for the IPO and over $1 million per year after that. That's a huge burden for a company with revenues of $35 million at the time. I have read that it is now $5 million for an IPO and that no company with revenues under $100 million can afford to be public. Malone says that there were 6 high tech IPOs in 2008 compared with 269 in 1999, similar numbers in earlier years. The failure of IPOs isn't going to affect entrepreneurship, but it could well affect VC funding because it eliminates their primary exit strategy. Malone does have a point about the FSAB. Treating options as an expense does make them less attractive to public companies, but it was an attempt to correct some egregious excesses. As usual, slap the big guys and hurt the little guys. Mark to market is an attempt to keep companies from hiding their investment losses in bookkeeping. The downside is that it makes their net worth much more volatile. AIG was a blivet in any case. Cutting capital gains was good. Giving Reagan credit for the boom of the 90s is pure BS. Cut the WSJ some slack. This was an op ed piece from an outsider. Malone used to be a San Jose Mercury News Reporter. He usually has something useful to say and he has the interests of the developer/entrepreneurial community at heart.
  - medearis 18y ago
    Malone isn't crediting Regan for the internet boom of the 90's. He is saying that cutting capital gains taxes helped spur the electronics boom in the 80's. Since we have had relatively low capital gains taxes for the last 30 years, and most of us agree that low capital gains taxes are a good thing for innovation, why would we consider raising them now? I do think its interesting that, even when Obama was talking about the potential for large cap. gains tax increases, he made a point to exempt "small businesses and startups." I'm not sure how we could draw that line, but it indicates to me that Obama has exactly Malone's general argument in mind.
wavesplash 18y ago
Pure subterfuge. A thinly veiled attempt to justify tax cuts and deregulation. AIG was killed by accounting? Try again. SOX hasn't killed the IPO, it's just made the hurdle higher and that's ok. IPOs are about consistent revenue generation - most of the firms of Web 1.0 didn't have it and didn't deserve to IPO. The WSJ has truly been compromised by Murdoch. NYTimes editorial on the death of the WSJ: http://tinyurl.com/6f879h http://tinyurl.com/6f879h
- ryanwaggoner 18y ago
  SOX hasn't killed the IPO, it's just made the hurdle higher and that's ok. IPOs are about consistent revenue generation - most of the firms of Web 1.0 didn't have it and didn't deserve to IPO. Wrong, wrong, and wrong. 1. SOX has killed the IPO; IPOs have plummeted since SOX, due to the ridiculously draconian laws that make compliance expensive and time-consuming. Startups and small companies just can't afford the costs, closing one of the two viable exits for founders and investors. 2. "Raising the bar" for IPOs makes it sound like we're just going to get higher quality. The reality is that most companies can't afford to IPO, and even if they can, they're now hampered by greater costs and the distractions of compliance. If the bar needs to be raised, let the market raise it. 3. IPOs are not about consistent revenue generation: they're about raising capital. There's absolutely no reason why a growth business like Facebook that is not profitable shouldn't be able to IPO. If the market likes their odds of succeeding in the long run, their IPO will be a success. If not, it won't. In your model, someone apparently gets to decide who "deserves" to IPO. This kind of thing has never worked and almost always has the opposite effect of that desired.
  - davidw 18y ago
    I'm willing to buy the argument that SOX is bad for startups. It's easy to knock things, though, and harder to suggest something better. His only suggestion is to lower capital gains taxes. I think there's also an argument that if you can't trust companies' books at all, that creates problems as well. Wikipedia has some useful information, as useful, see the 'Criticism' and 'Praise' sections: http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act#Criticism http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act#Criticism My guess is that it's one of those technical things where reworking it to keep what's good about it (making the CEO and CFO sign off on stuff sounds sensible), and dumping some of the bad bits is the best course of action. I also have a suspicion that perhaps lack of regulations wasn't the biggest problem, but lack of regulatory enforcement with some teeth to it.
Raphael 18y ago
Yeah! That's my evergreen state. Watch out, Houston; you're next.
- helveticaman 18y ago
  This is argues the federal government, not Washington State, is killing Silicon Valley and all tech centers like it.
  - Raphael 18y ago
    I know. It was a joke. Plus, it irks me that people omit the "D.C.", because it always confuses me for a few seconds.
beastman82 18y ago
This article is heavily biased, makes ridiculously exaggerated claims, and bends statistics to its will. The computer boom came about because of capital gains tax cuts, huh? What a joke.
- ksvs 18y ago
  I suspect capital gains cuts did help. Founders are influenced by colleagues who've done startups, and what they see is the after-tax returns. And certainly big investors are influenced by tax rates on each class of investment.
  - fallentimes 18y ago
    This is anecdotal, but I've never heard someone say they would or wouldn't start a company because of the after-tax returns. Cuban talks about this point here: http://blogmaverick.com/2008/10/23/the-cure-to-our-economic-problems/ http://blogmaverick.com/2008/10/23/the-cure-to-our-economic-...
    - ksvs 18y ago
      Of course not. After-tax returns influence them indirectly. Fellow grad student goes to work for a startup, ends up with a house vs merely a nice car.
      - fallentimes 18y ago
        Oh I guess I was thinking of the founders, not the employees.
- mmmurf 18y ago
  No I'm sure it came about because of a tax increase! (if taxes don't matter to investment decisions, then why not raise them to 99%?) If you believe current taxes are right at the "sweet spot", why do you believe that?
tokenadult 18y ago
I always like international comparisons as a reality check on discussion of policy in the United States. Are countries without regulations like Sarbanes-Oxley enjoying a boom in entrepreneurial start-ups? Where?
- ksvs 18y ago
  China
  - tokenadult 18y ago
    Are you planning to invest in a lot of Chinese start-ups?
    - mmmurf 18y ago
      Don't underestimate the entrepreneurial spirit that is going on in China. It's just political propaganda that China is oppressive and thwarts entrepreneurship. Sure there are some problems, but China's human rights issues are about on par with Gitmo.
  - fallentimes 18y ago
    You think not having SOX outweighs all the other hurdles associated with doing a startup in China? Like say, communism?
indiejade 18y ago
It's actually the deregulation of Washington that's suffocated entrepreneurship. Because there were/are no checks and balances on the large monoliths' ability to kill or absorb rivals, a lot of little entities have suffered. Washington always says it wants to do what is best for "business," but it rarely distinguishes big business from small. . . it doesn't get the correlation between size and efficiency. The hum-hawing about corporate tax rate is pure whine. Let the little companies live long enough to make a profit upon which they have the ability to pay taxes, eh?
- indiejade 18y ago
  Please don't downmod me without telling me why you've done so. Do you disagree with my points? Which ones? Are you pro-deregulation? If so, please provide some example about why you think big companies getting bigger by absorbing their competitors is good for entrepreneurship. Perhaps you have something against me personally? For that, I have no remedy, but to tweet for help: http://twitter.com/indiejade/status/1072506322 http://twitter.com/indiejade/status/1072506322
  - ksvs 18y ago
    "Resist complaining about being downmodded. It never does any good, and it makes boring reading." http://ycombinator.com/newsguidelines.html http://ycombinator.com/newsguidelines.html
    - deleted 18y ago
      [deleted]
  - jmatt 18y ago
    Are you pro-deregulation? yes. "We hold that all individuals have the right to exercise sole dominion over their own lives, and have the right to live in whatever manner they choose, so long as they do not forcibly interfere with the equal right of others to live in whatever manner they choose. Governments throughout history have regularly operated on the opposite principle, that the State has the right to dispose of the lives of individuals and the fruits of their labor. Even within the United States, all political parties other than our own grant to government the right to regulate the lives of individuals and seize the fruits of their labor without their consent." from http://www.lp.org/platform http://www.lp.org/platform
happylancer 18y ago
i think most entrepreneurs in SV do not think of regulations when starting a company. for example, there aren't any tax laws to my knowledge that makes me go, "ah gotta take care of that before i can code." of course, there will be an impact if a company wants to IPO, but that comes much later on. However, even in that case, it's more about revenue/income generation. i'm interested in seeing what's going to be the liquidation route for startups now since the M&A market is quiet now.
- Darmani 18y ago
  Small burdens are never directly visible. No entrepreneur thinks "If taxes were 5% lower, I'd start a startup." Instead, they think "If I had twice as much savings, I'd start a startup" without stopping to realize they're saving an amount equivalent to 5% of their taxes. In a similar vein, if my video game character gets -10% to speed (or +10%), I typically shrug it off as nothing, but it all too often is the difference between life and death. It was actually a comment similar to this one a few weeks ago on HN that made me recognize this as a bias. I wonder if there's any literature on it.
  - nostrademons 18y ago
    In my philosophy class, there was something called the Heap Problem: "One grain of sand is not a heap. Adding a grain of sand to something that is not a heap will not make it a heap. By induction, then, heaps cannot exist." The conclusion, of course, is obviously false, because heaps of sand do exist. But you can't state at what point something that's not-a-heap becomes a heap. AFAIK, this was still an open question when we covered it in class (2001). I don't know of anyone that's provided a convincing argument for why two premises that seem true result in a conclusion that's obviously false.
    - ryanwaggoner 18y ago
      Reminds me of Zeno's paradox about Achilles and the tortoise: Achilles is in a footrace with the tortoise. Achilles allows the tortoise a head start of 100 feet. If we suppose that each racer starts running at some constant speed (one very fast and one very slow), then after some finite time, Achilles will have run 100 feet, bringing him to the tortoise's starting point. During this time, the tortoise has run a much shorter distance, for example 10 feet. It will then take Achilles some further time to run that distance, in which time the tortoise will have advanced farther; and then more time still to reach this third point, while the tortoise moves ahead. Thus, whenever Achilles reaches somewhere the tortoise has been, he still has farther to go. Therefore, because there are an infinite number of points Achilles must reach where the tortoise has already been--he can never overtake the tortoise. http://en.wikipedia.org/wiki/Zeno%27s_paradoxes http://en.wikipedia.org/wiki/Zeno%27s_paradoxes
mooism2 18y ago
In a single paragraph, this article claims that options in start-ups aren't worth anything, and then claims that without start-ups being able to hand out options they can't attract the people they need. Are options highly valuable or worthless? It can't have it both ways.
- Darmani 18y ago
  Options are worthless because companies can't go public in most cases and therefore options can't be sold. To attract top employees, startups need the ability to give options which can be sold and therefore aren't worthless.
unrealwh 18y ago
totally the opposite! i can't think of one region that has benefited more from the Fed's policy of moving us to a bubble-based economy. the economic model of silicon valley in the last two decades has been predicated on transferring massive amounts of wealth from speculators to equity holders. normally this is a get-rich-slowly model. the Fed turned it into a get-rich-in-two-years model.
snow 18y ago
Sarbanes Oxley does hurt the IPO market, but for good reasons. It serves to protect public investors from unscrupulous accounting. Expensing stock options has been part of the International accounting standards for a while now and makes sense. Otherwise, you've hidden a lot of your costs from your financial statements. Also, forcing companies to acknowledge their special purpose entities prevents companies from hiding their debts. The article's point about "made sure that corporate directors would never again have financial privacy" is wrong. Financial transparency is always desired. Investment banks have to worry about the cost of exposing their strategy when buying & selling, why should managers be different considering they have a lot of insider information in their heads. SOX is bad for statups, but not for those reasons. The cost of compliance for smaller companies is too great in comparison to their income. The entire SOX shouldn't be brought down, it should be made more friendly for smaller corporations and an effort is already being made (see wikipedia under heading SOX 404 and smaller public companies)
mtw 18y ago
does anyone know if it's possible to do an IPO in Canada (instead of the london stock exchange, as the article suggests)?
gruseom 18y ago
Since SOX has all this overhead, I wonder if there's an opportunity for a startup focused on reducing it.
- fallentimes 18y ago
  You'd have to go through the government, which is even more overhead/TPS/bureacracy/politicking than SOX.
  - gruseom 18y ago
    That was my thought too, but then so many good ideas look dumb at first glance. It's possible that someone could make something of this. One trouble is that there can't be very many smart hackers with a passion for regulatory compliance.
strlen 18y ago
What Sox has done is effectively limit entrepreneurs to non-ambitious projects. That's why you see bright ex-Google guys leaving to do projects which are essentially either copy-cats or mash-ups (hardly any true technology involved, except in few very promising cases). With M&A as the only exit available, the pay out for any employee other than perhaps the first-five isn't going to be a "home run". Thus there would be nothing for them to justify giving up a higher salary, stability and working longer hours: their options won't be worth much. Trying to grow the company to post-SOX IPO size would also mean a much greater gamble and much greater time investment. Now the options wouldn't account for anything for possibly as long as ten years (which isn't much shorter than climbing the ladder at a big company). This means that smart hacker's most economically rational choice is either working for a big company (which issues RSUs or options for publicly tradeable stock) or co-founding or being employee# 1-5 in a less ambitious venture (which usually isn't going to provide very much of a technical challenge). Not all is bleak, however: it's unlikely that SOX will go (but perhaps I am a pessimist when it comes to govt. getting smaller) but we could see mid-size private companies providing revenue sharing/bonuses (in lieu of options), smarter M&A strategies (e.g. acquirers letting the companies they bought maintain their culture and grow, while offering employees additional upside or even spinning the ventures off for an IPO - but with big co's resources, most notable example of this is EMC + VMWARE acquisition and IPO) and finally markets where smaller players could still have interesting technologies to play with (vs. general database driven websites, which don't really involve much "hard core" tech).
- pg 18y ago
  I haven't seen this happening directly. I haven't seen founders thinking "We can't go public, so we'd better build something small." It could be happening via investors, though. It could be that e.g. Google decided to go for the big time partly because there was so much funding available in 1998, which in turn was true because investors were hoping for IPOs.
  - strlen 18y ago
    > I haven't seen this happening directly. I haven't seen founders thinking "We can't go public, so we'd better build something small." You haven't seen them say it directly, but how many applications do you get that are for fairly ambitious and big projects? What percentage are front-end heavy web-apps/aggregators? What percentage are fairly ambitious and require a serious research, development and have a huge potential for growth? That's a question you may be able to answer better than anyone else (although I'd imagine most YC applicants are a self-selected crowd and those hoping for an exit other than M&A and to hire a great deal of talent may not even apply to YC). I also didn't think about the investment angle at all. I wonder how much investors are pushing for companies to sell quickly vs. grow.
timr 18y ago
The editorial went off the tracks right here: "FASB's "mark-to-market" accounting rules helped drive AIG and Bear Stearns into bankruptcy, even though they were cash-positive." Claiming that mark-to-market accounting killed Bear and AIG is a bit like claiming that seat-belt laws kill people who drive drunk. AIG and Bear were engaged in a fatal game, regardless of the accounting rules. Mark-to-market accounting may have accelerated the crash (by forcing them to account for bad investments today, instead of hiding them on the balance sheet for some indefinite time), but the fundamentals of their crappy investments didn't change as a result of the rule.
- Prrometheus 18y ago
  There are certainly companies whose cash flows were positive, but were driven into bankruptcy because the value of their assets crashed. We were trying to raise money for a fixed rate subprime mortgage company in 2007. They had remarkably good underwriting and very low defaults. But the value of their assets kept on plummeting, and they were forced to meet margin calls by their creditors. That firm no longer exists. However, the cash coming in from their assets could have paid their debt and operating expenses indefinitely. If there was no mark-to-market, then I would know a hundred or so extra people in New York with jobs.
  - timr 18y ago
    One could make a reasonable argument that if their balance sheet was so tied up in sketchy mortgage assets that they were forced to meet margin calls when the market fell, then they weren't as solid as they seemed. Their problems started before they got in the car. I realize that there's a bit of begging-the-question here, but even so, if you've borrowed a ton of money and secured it with "assets" of questionable value, then you're taking a risky bet. The accounting regulations didn't make the bet better or worse -- they just kicked the losers out of the game before they wanted to quit.
    - mmmurf 18y ago
      The purpose of mark-to-market exceptions are to allow temporary price volatility not to drastically impact a firm's balance sheet. The FASB rule specifies that it's an acceptable practice to suspend mark-to-market in "fire sale" conditions. But the real issue is the flawed risk ratings on the MBSs. If your asset is AAA then it really shouldn't matter whether you are marking it to market or not, as it's supposed to be quite liquid, by definition, as there is supposed to be extremely little risk that its price will fall. The reason the MBSs weren't liquid is because the ratings were incorrect and the market knew that -- perverse incentives from ratings agencies had led to this, as had the widespread belief (taken as an assumption by many foolish risk-managers and codified into pricing formulae) that housing prices could not fall. If the MBSs had been properly rated, then mark-to-market would not have caused the firms holding them on their books to become insolvent, as capital adequacy requirements are based on the riskiness of the assets. So while mark-to-market may have sped up the failure of those firms, the firms were already weakened due to their treatment (thanks to bad ratings) of risky debt as AAA. In fact, a few months before things got really bad the SEC sent out a memo advising that the fire-sale provisions of the FASB rule regarding mark-to-market were not to be used, a decision which suggests either that the SEC was OK with some firms failing in the near future (unlikely) or that it believed that the ratings were generally accurate (even more unlikely). I've been told by some Wall Street experts that everybody knew that the ratings were BS. Hence the SEC's decision to send the memo was probably just intended not to telegraph the possibility of a future problem to avoid spooking the market in hopes that the problem would go away. A few things to note: The regulatory trend is moving toward BASEL II which relies heavily on both mark-to-market accounting and third party ratings agency ratings. So the big regulatory question is, how can the perverse incentives that arose and led to the inaccurate ratings of MBSs be restrained? So far everyone is talking about banning the trading of x, y, and z and of limiting bonus pay, executive salaries, etc., but nobody is talking about the actual concrete perverse incentives (pressure on ratings firms to issue inaccurate ratings) that fed the whole mess.
quoderat 18y ago
Pabulum for people who have Rand or Heinlein poisoning. Saying that Bear Stearns and AIG were cash positive is absolutely meaningless, as if I just bought $5 million worth of stuff on my credit card, make $40,000 a year and haven't gotten a bill yet, I'm still cash positive. It's a little different, and much more complex, but I don't think the article writer really cares to understand any of that -- he just wants to beat the dereg drum, no matter how much sense it makes or doesn't.
sabat 18y ago
I rarely if ever agree with the WSJ, but here's an example of where I think they've mostly got everything right. Ayn Rand was naive but did have a point: innovation happens when you leave the innovators the hell alone and let them invent. Washington is indeed fooling with that formula.

81 points by prakash 18y ago

known 18y ago

I think companies that are willing to comply with http://en.wikipedia.org/wiki/Freedom_of_information_in_the_United_States http://en.wikipedia.org/wiki/Freedom_of_information_in_the_U... should be exempted from SOX so that they can raise funds through IPO.

tokenadult 18y ago

Voted up because the premise of the article is interesting. But I disagree with the statement that Sarbanes-Oxley is killing entrepreneurship, so I'd like to hear comments about that from the entrepreneurs here. I'm also not sure that it is a sign of failure that many start-ups sell themselves to an existing big company rather than doing an IPO. It seems to me (again I would like to hear from the entrepreneurs here about this) that the whole point of starting a start-up is to have FLEXIBILITY to decide later how to cash out the business. Some like to sell to one company, some like to sell shares to the public at large, and some stay closely held for a long time. To each their own, methinks.

ohhmaagawd 18y ago
I know a CEO of an Internet company that planned on doing an IPO in 2008. Of course the economy tanked so it's not happening. He told me that SOX required the company to have auditing/traceability and controls for everything. This meant they quit using any software as a service applications, they shut down IM, they have to keep track of everything on every machine, banned a whole list of applications that would interfere with SOX (iTunes, file sharing, and music app), etc. They had to hire lawyers, more accountants, consulting firms. He told me they were looking at > 10m to comply. And that doesn't count lost productivity of having to act like a draconian big ass company where they had to have design docs for everything they do, detailed project plans, get rid of the tools they use (as listed above), etc. In other words to go IPO now you give up agility, spend more money, and become less productive.
- deleted 18y ago
  [deleted]
- Retric 18y ago
  IPO's are for large profitable companies who want to add liquidity. There is a huge pool of companies and people that invest billions in companies without an IPO, but there is a lot of laws setup to protect small investors. Anyway, there is a lot of overhead to going public, but if you want liquidity without selling then you need transparency or some company's are going to do huge scams. PS: There are IM clients that large companies can use so clearly some of what he said was BS.
  - fallentimes 18y ago
    Well it used to be for raising large amounts of capital (even for unprofitable companies). This is apparently no longer the case.
  - coryrc 18y ago
    "but there is a lot of laws setup to protect small investors" Or to prevent them from investing in private companies without giving a piece to NY bankers? (Not implying you necessarily disagree) Cray started illegally with small investors who all ended up making a lot of money. In the Midwest too! Good thing Washington isn't allowing that to happen again.
- puzzle-out 18y ago
  This is one of Malone's more polemical pieces, and I imagine here he is willing to sacrifice some local nuances to appeal to a wider, non-SV audience. I think his overall argument is correct - we would see more IPOs if SOX were abolished, or at least reformed. From an editorial perspective, I think he should have included the comments of a CEO ala ohhmaagawd - Malone is certainly networked enough to do so.
Herring 18y ago
But clearly something has changed. FTA: "According to the National Venture Capital Association, in all of 2008 there have been just six companies that have gone public. Compare that with 269 IPOs in 1999, 272 in 1996, and 365 in 1986." It's probably more complex than that, or he'd have hammered the point a lot more. I'd love to see a graph, for instance.
- beastman82 18y ago
  I'm sure it went something like this: 1)Give the number from this economically disastrous year, 2)find the other years with the highest number of IPO's and list them. 3)Use this ridiculously skewed comparison to prove your point
  - ohhmaagawd 18y ago
    Take a look at the years since SOX was passed. IPOs have plummeted.
    - beastman82 18y ago
      I would love to, if WSJ provided the aforementioned graph.
      - wavesplash 18y ago
        Not a graph, but here's a table of IPO data: http://bear.cba.ufl.edu/ritter/IPOs2008VC.pdf http://bear.cba.ufl.edu/ritter/IPOs2008VC.pdf
    - wavesplash 18y ago
      correlation != causation.
  - jerf 18y ago
    2008 wasn't economically "disastrous" until the very end. Up until October, it wasn't too dissimilar from 2007. http://lawprofessors.typepad.com/securities/2008/02/januarys-ipo-co.html http://lawprofessors.typepad.com/securities/2008/02/januarys... : "January [2008] was a slow month for IPOs, with only five that raised a total of $892 million. This compares with ten in January 2007 that raised a total of $2.25 billion." I quickly googled, and there's probably more to look at here, since either 5 of the 6 IPOs did it in January, or there's different counting methodology in action here. Still, it's down even in months that weren't bad. It's not just statistical gaming, even if that's in play. Asking what changed is still fair.
russell 18y ago
I worked for a company a couple of years ago that was planning to public in a year or two. The CEO told us that complying with SOX would cost $3 million for the IPO and over $1 million per year after that. That's a huge burden for a company with revenues of $35 million at the time. I have read that it is now $5 million for an IPO and that no company with revenues under $100 million can afford to be public. Malone says that there were 6 high tech IPOs in 2008 compared with 269 in 1999, similar numbers in earlier years. The failure of IPOs isn't going to affect entrepreneurship, but it could well affect VC funding because it eliminates their primary exit strategy. Malone does have a point about the FSAB. Treating options as an expense does make them less attractive to public companies, but it was an attempt to correct some egregious excesses. As usual, slap the big guys and hurt the little guys. Mark to market is an attempt to keep companies from hiding their investment losses in bookkeeping. The downside is that it makes their net worth much more volatile. AIG was a blivet in any case. Cutting capital gains was good. Giving Reagan credit for the boom of the 90s is pure BS. Cut the WSJ some slack. This was an op ed piece from an outsider. Malone used to be a San Jose Mercury News Reporter. He usually has something useful to say and he has the interests of the developer/entrepreneurial community at heart.
- medearis 18y ago
  Malone isn't crediting Regan for the internet boom of the 90's. He is saying that cutting capital gains taxes helped spur the electronics boom in the 80's. Since we have had relatively low capital gains taxes for the last 30 years, and most of us agree that low capital gains taxes are a good thing for innovation, why would we consider raising them now? I do think its interesting that, even when Obama was talking about the potential for large cap. gains tax increases, he made a point to exempt "small businesses and startups." I'm not sure how we could draw that line, but it indicates to me that Obama has exactly Malone's general argument in mind.

wavesplash 18y ago

Pure subterfuge. A thinly veiled attempt to justify tax cuts and deregulation. AIG was killed by accounting? Try again. SOX hasn't killed the IPO, it's just made the hurdle higher and that's ok. IPOs are about consistent revenue generation - most of the firms of Web 1.0 didn't have it and didn't deserve to IPO. The WSJ has truly been compromised by Murdoch. NYTimes editorial on the death of the WSJ: http://tinyurl.com/6f879h http://tinyurl.com/6f879h

ryanwaggoner 18y ago
SOX hasn't killed the IPO, it's just made the hurdle higher and that's ok. IPOs are about consistent revenue generation - most of the firms of Web 1.0 didn't have it and didn't deserve to IPO. Wrong, wrong, and wrong. 1. SOX has killed the IPO; IPOs have plummeted since SOX, due to the ridiculously draconian laws that make compliance expensive and time-consuming. Startups and small companies just can't afford the costs, closing one of the two viable exits for founders and investors. 2. "Raising the bar" for IPOs makes it sound like we're just going to get higher quality. The reality is that most companies can't afford to IPO, and even if they can, they're now hampered by greater costs and the distractions of compliance. If the bar needs to be raised, let the market raise it. 3. IPOs are not about consistent revenue generation: they're about raising capital. There's absolutely no reason why a growth business like Facebook that is not profitable shouldn't be able to IPO. If the market likes their odds of succeeding in the long run, their IPO will be a success. If not, it won't. In your model, someone apparently gets to decide who "deserves" to IPO. This kind of thing has never worked and almost always has the opposite effect of that desired.
- davidw 18y ago
  I'm willing to buy the argument that SOX is bad for startups. It's easy to knock things, though, and harder to suggest something better. His only suggestion is to lower capital gains taxes. I think there's also an argument that if you can't trust companies' books at all, that creates problems as well. Wikipedia has some useful information, as useful, see the 'Criticism' and 'Praise' sections: http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act#Criticism http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act#Criticism My guess is that it's one of those technical things where reworking it to keep what's good about it (making the CEO and CFO sign off on stuff sounds sensible), and dumping some of the bad bits is the best course of action. I also have a suspicion that perhaps lack of regulations wasn't the biggest problem, but lack of regulatory enforcement with some teeth to it.

Raphael 18y ago

Yeah! That's my evergreen state. Watch out, Houston; you're next.

helveticaman 18y ago
This is argues the federal government, not Washington State, is killing Silicon Valley and all tech centers like it.
- Raphael 18y ago
  I know. It was a joke. Plus, it irks me that people omit the "D.C.", because it always confuses me for a few seconds.

beastman82 18y ago

This article is heavily biased, makes ridiculously exaggerated claims, and bends statistics to its will. The computer boom came about because of capital gains tax cuts, huh? What a joke.

ksvs 18y ago
I suspect capital gains cuts did help. Founders are influenced by colleagues who've done startups, and what they see is the after-tax returns. And certainly big investors are influenced by tax rates on each class of investment.
- fallentimes 18y ago
  This is anecdotal, but I've never heard someone say they would or wouldn't start a company because of the after-tax returns. Cuban talks about this point here: http://blogmaverick.com/2008/10/23/the-cure-to-our-economic-problems/ http://blogmaverick.com/2008/10/23/the-cure-to-our-economic-...
  - ksvs 18y ago
    Of course not. After-tax returns influence them indirectly. Fellow grad student goes to work for a startup, ends up with a house vs merely a nice car.
    - fallentimes 18y ago
      Oh I guess I was thinking of the founders, not the employees.
mmmurf 18y ago
No I'm sure it came about because of a tax increase! (if taxes don't matter to investment decisions, then why not raise them to 99%?) If you believe current taxes are right at the "sweet spot", why do you believe that?

tokenadult 18y ago

I always like international comparisons as a reality check on discussion of policy in the United States. Are countries without regulations like Sarbanes-Oxley enjoying a boom in entrepreneurial start-ups? Where?

ksvs 18y ago
China
- tokenadult 18y ago
  Are you planning to invest in a lot of Chinese start-ups?
  - mmmurf 18y ago
    Don't underestimate the entrepreneurial spirit that is going on in China. It's just political propaganda that China is oppressive and thwarts entrepreneurship. Sure there are some problems, but China's human rights issues are about on par with Gitmo.
- fallentimes 18y ago
  You think not having SOX outweighs all the other hurdles associated with doing a startup in China? Like say, communism?

indiejade 18y ago

It's actually the deregulation of Washington that's suffocated entrepreneurship. Because there were/are no checks and balances on the large monoliths' ability to kill or absorb rivals, a lot of little entities have suffered. Washington always says it wants to do what is best for "business," but it rarely distinguishes big business from small. . . it doesn't get the correlation between size and efficiency. The hum-hawing about corporate tax rate is pure whine. Let the little companies live long enough to make a profit upon which they have the ability to pay taxes, eh?

indiejade 18y ago
Please don't downmod me without telling me why you've done so. Do you disagree with my points? Which ones? Are you pro-deregulation? If so, please provide some example about why you think big companies getting bigger by absorbing their competitors is good for entrepreneurship. Perhaps you have something against me personally? For that, I have no remedy, but to tweet for help: http://twitter.com/indiejade/status/1072506322 http://twitter.com/indiejade/status/1072506322
- ksvs 18y ago
  "Resist complaining about being downmodded. It never does any good, and it makes boring reading." http://ycombinator.com/newsguidelines.html http://ycombinator.com/newsguidelines.html
  - deleted 18y ago
    [deleted]
- jmatt 18y ago
  Are you pro-deregulation? yes. "We hold that all individuals have the right to exercise sole dominion over their own lives, and have the right to live in whatever manner they choose, so long as they do not forcibly interfere with the equal right of others to live in whatever manner they choose. Governments throughout history have regularly operated on the opposite principle, that the State has the right to dispose of the lives of individuals and the fruits of their labor. Even within the United States, all political parties other than our own grant to government the right to regulate the lives of individuals and seize the fruits of their labor without their consent." from http://www.lp.org/platform http://www.lp.org/platform

happylancer 18y ago

i think most entrepreneurs in SV do not think of regulations when starting a company. for example, there aren't any tax laws to my knowledge that makes me go, "ah gotta take care of that before i can code." of course, there will be an impact if a company wants to IPO, but that comes much later on. However, even in that case, it's more about revenue/income generation. i'm interested in seeing what's going to be the liquidation route for startups now since the M&A market is quiet now.

Darmani 18y ago
Small burdens are never directly visible. No entrepreneur thinks "If taxes were 5% lower, I'd start a startup." Instead, they think "If I had twice as much savings, I'd start a startup" without stopping to realize they're saving an amount equivalent to 5% of their taxes. In a similar vein, if my video game character gets -10% to speed (or +10%), I typically shrug it off as nothing, but it all too often is the difference between life and death. It was actually a comment similar to this one a few weeks ago on HN that made me recognize this as a bias. I wonder if there's any literature on it.
- nostrademons 18y ago
  In my philosophy class, there was something called the Heap Problem: "One grain of sand is not a heap. Adding a grain of sand to something that is not a heap will not make it a heap. By induction, then, heaps cannot exist." The conclusion, of course, is obviously false, because heaps of sand do exist. But you can't state at what point something that's not-a-heap becomes a heap. AFAIK, this was still an open question when we covered it in class (2001). I don't know of anyone that's provided a convincing argument for why two premises that seem true result in a conclusion that's obviously false.
  - ryanwaggoner 18y ago
    Reminds me of Zeno's paradox about Achilles and the tortoise: Achilles is in a footrace with the tortoise. Achilles allows the tortoise a head start of 100 feet. If we suppose that each racer starts running at some constant speed (one very fast and one very slow), then after some finite time, Achilles will have run 100 feet, bringing him to the tortoise's starting point. During this time, the tortoise has run a much shorter distance, for example 10 feet. It will then take Achilles some further time to run that distance, in which time the tortoise will have advanced farther; and then more time still to reach this third point, while the tortoise moves ahead. Thus, whenever Achilles reaches somewhere the tortoise has been, he still has farther to go. Therefore, because there are an infinite number of points Achilles must reach where the tortoise has already been--he can never overtake the tortoise. http://en.wikipedia.org/wiki/Zeno%27s_paradoxes http://en.wikipedia.org/wiki/Zeno%27s_paradoxes

mooism2 18y ago

In a single paragraph, this article claims that options in start-ups aren't worth anything, and then claims that without start-ups being able to hand out options they can't attract the people they need. Are options highly valuable or worthless? It can't have it both ways.

Darmani 18y ago
Options are worthless because companies can't go public in most cases and therefore options can't be sold. To attract top employees, startups need the ability to give options which can be sold and therefore aren't worthless.

unrealwh 18y ago

totally the opposite! i can't think of one region that has benefited more from the Fed's policy of moving us to a bubble-based economy. the economic model of silicon valley in the last two decades has been predicated on transferring massive amounts of wealth from speculators to equity holders. normally this is a get-rich-slowly model. the Fed turned it into a get-rich-in-two-years model.

snow 18y ago

Sarbanes Oxley does hurt the IPO market, but for good reasons. It serves to protect public investors from unscrupulous accounting. Expensing stock options has been part of the International accounting standards for a while now and makes sense. Otherwise, you've hidden a lot of your costs from your financial statements. Also, forcing companies to acknowledge their special purpose entities prevents companies from hiding their debts. The article's point about "made sure that corporate directors would never again have financial privacy" is wrong. Financial transparency is always desired. Investment banks have to worry about the cost of exposing their strategy when buying & selling, why should managers be different considering they have a lot of insider information in their heads. SOX is bad for statups, but not for those reasons. The cost of compliance for smaller companies is too great in comparison to their income. The entire SOX shouldn't be brought down, it should be made more friendly for smaller corporations and an effort is already being made (see wikipedia under heading SOX 404 and smaller public companies)

mtw 18y ago

does anyone know if it's possible to do an IPO in Canada (instead of the london stock exchange, as the article suggests)?

gruseom 18y ago

Since SOX has all this overhead, I wonder if there's an opportunity for a startup focused on reducing it.

fallentimes 18y ago
You'd have to go through the government, which is even more overhead/TPS/bureacracy/politicking than SOX.
- gruseom 18y ago
  That was my thought too, but then so many good ideas look dumb at first glance. It's possible that someone could make something of this. One trouble is that there can't be very many smart hackers with a passion for regulatory compliance.

strlen 18y ago

What Sox has done is effectively limit entrepreneurs to non-ambitious projects. That's why you see bright ex-Google guys leaving to do projects which are essentially either copy-cats or mash-ups (hardly any true technology involved, except in few very promising cases). With M&A as the only exit available, the pay out for any employee other than perhaps the first-five isn't going to be a "home run". Thus there would be nothing for them to justify giving up a higher salary, stability and working longer hours: their options won't be worth much. Trying to grow the company to post-SOX IPO size would also mean a much greater gamble and much greater time investment. Now the options wouldn't account for anything for possibly as long as ten years (which isn't much shorter than climbing the ladder at a big company). This means that smart hacker's most economically rational choice is either working for a big company (which issues RSUs or options for publicly tradeable stock) or co-founding or being employee# 1-5 in a less ambitious venture (which usually isn't going to provide very much of a technical challenge). Not all is bleak, however: it's unlikely that SOX will go (but perhaps I am a pessimist when it comes to govt. getting smaller) but we could see mid-size private companies providing revenue sharing/bonuses (in lieu of options), smarter M&A strategies (e.g. acquirers letting the companies they bought maintain their culture and grow, while offering employees additional upside or even spinning the ventures off for an IPO - but with big co's resources, most notable example of this is EMC + VMWARE acquisition and IPO) and finally markets where smaller players could still have interesting technologies to play with (vs. general database driven websites, which don't really involve much "hard core" tech).

pg 18y ago
I haven't seen this happening directly. I haven't seen founders thinking "We can't go public, so we'd better build something small." It could be happening via investors, though. It could be that e.g. Google decided to go for the big time partly because there was so much funding available in 1998, which in turn was true because investors were hoping for IPOs.
- strlen 18y ago
  > I haven't seen this happening directly. I haven't seen founders thinking "We can't go public, so we'd better build something small." You haven't seen them say it directly, but how many applications do you get that are for fairly ambitious and big projects? What percentage are front-end heavy web-apps/aggregators? What percentage are fairly ambitious and require a serious research, development and have a huge potential for growth? That's a question you may be able to answer better than anyone else (although I'd imagine most YC applicants are a self-selected crowd and those hoping for an exit other than M&A and to hire a great deal of talent may not even apply to YC). I also didn't think about the investment angle at all. I wonder how much investors are pushing for companies to sell quickly vs. grow.

timr 18y ago

The editorial went off the tracks right here: "FASB's "mark-to-market" accounting rules helped drive AIG and Bear Stearns into bankruptcy, even though they were cash-positive." Claiming that mark-to-market accounting killed Bear and AIG is a bit like claiming that seat-belt laws kill people who drive drunk. AIG and Bear were engaged in a fatal game, regardless of the accounting rules. Mark-to-market accounting may have accelerated the crash (by forcing them to account for bad investments today, instead of hiding them on the balance sheet for some indefinite time), but the fundamentals of their crappy investments didn't change as a result of the rule.

Prrometheus 18y ago
There are certainly companies whose cash flows were positive, but were driven into bankruptcy because the value of their assets crashed. We were trying to raise money for a fixed rate subprime mortgage company in 2007. They had remarkably good underwriting and very low defaults. But the value of their assets kept on plummeting, and they were forced to meet margin calls by their creditors. That firm no longer exists. However, the cash coming in from their assets could have paid their debt and operating expenses indefinitely. If there was no mark-to-market, then I would know a hundred or so extra people in New York with jobs.
- timr 18y ago
  One could make a reasonable argument that if their balance sheet was so tied up in sketchy mortgage assets that they were forced to meet margin calls when the market fell, then they weren't as solid as they seemed. Their problems started before they got in the car. I realize that there's a bit of begging-the-question here, but even so, if you've borrowed a ton of money and secured it with "assets" of questionable value, then you're taking a risky bet. The accounting regulations didn't make the bet better or worse -- they just kicked the losers out of the game before they wanted to quit.
  - mmmurf 18y ago
    The purpose of mark-to-market exceptions are to allow temporary price volatility not to drastically impact a firm's balance sheet. The FASB rule specifies that it's an acceptable practice to suspend mark-to-market in "fire sale" conditions. But the real issue is the flawed risk ratings on the MBSs. If your asset is AAA then it really shouldn't matter whether you are marking it to market or not, as it's supposed to be quite liquid, by definition, as there is supposed to be extremely little risk that its price will fall. The reason the MBSs weren't liquid is because the ratings were incorrect and the market knew that -- perverse incentives from ratings agencies had led to this, as had the widespread belief (taken as an assumption by many foolish risk-managers and codified into pricing formulae) that housing prices could not fall. If the MBSs had been properly rated, then mark-to-market would not have caused the firms holding them on their books to become insolvent, as capital adequacy requirements are based on the riskiness of the assets. So while mark-to-market may have sped up the failure of those firms, the firms were already weakened due to their treatment (thanks to bad ratings) of risky debt as AAA. In fact, a few months before things got really bad the SEC sent out a memo advising that the fire-sale provisions of the FASB rule regarding mark-to-market were not to be used, a decision which suggests either that the SEC was OK with some firms failing in the near future (unlikely) or that it believed that the ratings were generally accurate (even more unlikely). I've been told by some Wall Street experts that everybody knew that the ratings were BS. Hence the SEC's decision to send the memo was probably just intended not to telegraph the possibility of a future problem to avoid spooking the market in hopes that the problem would go away. A few things to note: The regulatory trend is moving toward BASEL II which relies heavily on both mark-to-market accounting and third party ratings agency ratings. So the big regulatory question is, how can the perverse incentives that arose and led to the inaccurate ratings of MBSs be restrained? So far everyone is talking about banning the trading of x, y, and z and of limiting bonus pay, executive salaries, etc., but nobody is talking about the actual concrete perverse incentives (pressure on ratings firms to issue inaccurate ratings) that fed the whole mess.

quoderat 18y ago

Pabulum for people who have Rand or Heinlein poisoning. Saying that Bear Stearns and AIG were cash positive is absolutely meaningless, as if I just bought $5 million worth of stuff on my credit card, make $40,000 a year and haven't gotten a bill yet, I'm still cash positive. It's a little different, and much more complex, but I don't think the article writer really cares to understand any of that -- he just wants to beat the dereg drum, no matter how much sense it makes or doesn't.

sabat 18y ago

I rarely if ever agree with the WSJ, but here's an example of where I think they've mostly got everything right. Ayn Rand was naive but did have a point: innovation happens when you leave the innovators the hell alone and let them invent. Washington is indeed fooling with that formula.