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Disclaimer: I'm a VC at Atlas Venture (http://www.atlasventure.com/ http://www.atlasventure.com/). The Patricof article echoes pretty much exactly the position
by maxniederhofer 17y ago
Disclaimer: I'm a VC at Atlas Venture (http://www.atlasventure.com/ http://www.atlasventure.com/).
The Patricof article echoes pretty much exactly the position of the National Venture Capital Association (its statement to congress is here: http://bit.ly/M92Ux http://bit.ly/M92Ux [PDF]).
Essentially:
1. Venture capital firms are not interdependent with the world financial system - we don't trade public markets, we don't rely on banks, we don't insure things
2. The venture capital industry is small in size and thus not "systemic" in relevance
3. Venture capital firms do not use long-term leverage or rely on short-term funding - i.e. we don't punch above our "equity" weight
4. Regulation under the currently proposed act would significantly increase costs and change the way venture could operate - insofar the parallels drawn to SOX or anti-money laundering are correct
In particular, we'd have to add more administrative staff and would potentially face issues in performance-based contractual relationships with some of our investors (limited partners).
The argument in a nutshell is that the Act seeks to address problems caused by buy-out and hedge funds. We're being lumped into something because of our similar structures, not because of what we do. Transparency is a laudable goal and I think the venture capital industry as a whole would be more open to thinking about making itself more transparent if such regulation recognized that venture is actually not a part of the problem, but an essential catalyst for growth in our economies.
I am personally a subscriber to a libertarian, subsidiarist principle of legislation. There is no need to regulate VC in the way intended by congress: why should we erect barriers to entry, dissuade new investors into venture capital, make it less profitable (than it already is)?
- sachinag 17y agoFigure out and adapt a fundamentally different legal structure and this issue goes away. The cost of writing a law full of loopholes that allows hedge and PE funds to "look" like VC funds is higher than the added costs to firms like Atlas. (Let's be honest: this ain't gonna drive Atlas out of business, nor will it affect angel investors. It would only kill the crappy $20-50MM funds.) And if anyone thinks I'm crazy, I want to point out that Mitt Romney has always described himself as a "venture capitalist," as far back as his 1994 Senate run, although everyone knows that Bain Capital is a PE shop. Disclaimer: I did my time on the dark side at a healthcare VC firm, and now I'm on the entrepreneur side.
- mediaman 17y agoCouldn't a threshhold level of debt usage be a line of delineation? Debt is a complex subject, but FASB has well-defined means to determine whether a security instrument is debt or equity.
- sachinag 17y agoYou can have leverage without debt through the use of options and other derivatives. The leverage is the systemic structural issue, not the notional amount of debt.
- mediaman 17y agoTrue, leverage comes in many forms. But what form of leverage could a VC firm engage in that they could not easily be restricted from in order to qualify for less onerous regulation? Restrictions on the use of derivatives is as easy to restrict as debt instruments.
- yummyfajitas 17y agoOk, so you want to force existing VC's to adopt a different legal structure (probably a less efficient one) and kill the smaller players in the market (the "crappy $20-50MM funds"). What's the benefit of all of this? Getting a bunch of legalese reports from surviving VC's that say "we have no leverage?"