6 ms·

Washington Versus Silicon Valley

55 points by jsyedidia 17y ago

pj 17y 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!
- _pi 17y 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.
  - pj 17y 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?
    - _pi 17y ago
      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.
      - pj 17y ago
        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.
        _pi 17y ago
        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.
        zargon 17y ago
        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 http://www.cmaj.ca/cgi/reprint/164/6/825) Still not a monopoly?
        catzaa 17y ago
        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.
- ricaurte 17y 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.
  - joubert 17y ago
    But the institutions that invest in them do.
    - byrneseyeview 17y ago
      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.
      - joubert 17y ago
        The issue is that the investors are overwhelmingly public and corporate pension funds, endowments, fund-of-funds, etc.
        ricaurte 17y ago
        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.
- feverishaaron 17y 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.
joubert 17y 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 17y ago
Oh, the other Washington.
- rottencupcakes 17y 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.
- deleted 17y ago
  [deleted]
grellas 17y 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 17y 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 17y 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.
- hristov 17y 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.
matt1 17y 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 17y 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.
  - pyre 17y 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.
    - anamax 17y ago
      > 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.
      - deleted 17y ago
        [deleted]
      - pyre 17y ago
        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.
tici_88 17y 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 17y ago
Suits go out and owe money all over town and the government pees on our rug?
catzaa 17y 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 17y 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."

55 points by jsyedidia 17y ago

pj 17y 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!

_pi 17y 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.
- pj 17y 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?
  - _pi 17y ago
    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.
    - pj 17y ago
      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.
      - _pi 17y ago
        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.
        zargon 17y ago
        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 http://www.cmaj.ca/cgi/reprint/164/6/825) Still not a monopoly?
        catzaa 17y ago
        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.
ricaurte 17y 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.
- joubert 17y ago
  But the institutions that invest in them do.
  - byrneseyeview 17y ago
    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.
    - joubert 17y ago
      The issue is that the investors are overwhelmingly public and corporate pension funds, endowments, fund-of-funds, etc.
      - ricaurte 17y ago
        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.
feverishaaron 17y 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.

joubert 17y 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 17y ago

Oh, the other Washington.

rottencupcakes 17y 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.
deleted 17y ago
[deleted]

grellas 17y 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 17y 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 17y 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.
hristov 17y 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.

matt1 17y 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 17y 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.
- pyre 17y 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.
  - anamax 17y ago
    > 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.
    - deleted 17y ago
      [deleted]
    - pyre 17y ago
      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.

tici_88 17y 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 17y ago

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

catzaa 17y 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 17y 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."