> Fact is, startups operate in a financial system that is inefficient, illiquid, and challenging to manage. Well, that's certainly true... > more transactions

> Fact is, startups operate in a financial system that is inefficient, illiquid, and challenging to manage. Well, that's certainly true... > more transactions of any kind or size help improve overall startup ecosystem health. While more transactions in theory improves market efficiency (throughout this post, I will be using efficiency informally), in practice this fact doesn't matter. In order for the number of transactions to have any meaningful impact on the actual efficiency of the venture capital markets, the number of transactions would have to increase by a lot, not by the occasional Mint.com here and there. Take this as informed speculation, but I don't even think a doubling of transactions would have a meaningful impact on the efficiency on the market, because of the severe restraints regarding information and transparency. To see how this plays out in practice, just imagine that you are marketing your company for a round of financing. You may know the valuations and terms of a handful of other investments (and none that are directly comparable, in all likelihood) essentially from word of mouth or from the experiences of advisors/banks/investors (who also don't have very good information) and use those as a very rough benchmark, but in the end that handful is not at all representative. Even if you double that handful, it still isn't representative, at least, not enough to persuade anyone much more of the correct value. On the other hand, if companies were forced to make a regulatory filing that included 1. current revenue, 2. details on the round of financing (valuation, preferences, participation features, etc.), the effect would be much greater market efficiency even if number transactions stayed at the same level. The barriers are information-related rather than transaction-volume-related. > In the long-run, it benefits all system participants for small transactions to occur, because it makes the overall market more knowledgeable -- this in turn, reduces risk and encourages greater investment... which also encourages greater (overall) returns. Obviously you could argue this point either way (since there are a lot of definitions to play with in the above paragraph), but in truth, a more efficient, more liquid market doesn't benefit all system participants. It would certainly benefit entrepreneurs if there were greater transparency and efficiency, since they are definitely on the wrong side of information barriers. Greater market transparency tends to DECREASE investment returns in that market, because it removes a source of risk (and risk and returns are inversely related). It would probably encourage greater investment, but that could be increased even more by other means, and given venture capital returns over the last decade, it is not clear that this would be a net benefit for the economy. Additionally, the more dollars invested, the worse returns will be generally speaking (more dollars chasing fewer good ideas). But, he uses the word overall, so maybe he means overall returns including returns to entrepreneurs rather than capital sources, but that gets into even more murky territory. Just to be concrete, I'll give one example from another financial market. Prior to 2001, stocks traded in the US were traded in fractions of a dollar. The smallest quotation unit was 1/16, which means the smallest spread a market-maker would quote was 6.25 cents. The spread is how these firms make money. In exchange for always having shares available, they charge you (at least) 6.25 cents more for the share than they are willing to buy it from you. For decades, market-making was good business, but after decimal pricing was implemented, these spreads became much smaller, due to competition. Now, market-making activities are basically not a source of profit for financial firms. A regulation that lead to greater liquidity in the market was very much non beneficial to certain market participants, namely, market-makers (many of these were large institutions that you could argue benefited from bigger transaction volumes in other areas, but this is not always the case).