Is Silicon Valley a systemic risk?
April 8, 2009 11:02 PM Subscribe
Is Silicon Valley a systemic risk? Treasury decides to treat venture capitalists like hedge funds The Obama administration wants to regulate venture capital firms to prevent systemic risks. Silicon Valley residents are scratching their heads and asking: What risks? The rest of us should ask why Washington is targeting a jewel of the American economy that had nothing to do with the housing bubble.
"I cannot imagine any venture fund being of a size to pose 'systemic risk,' so they either don't understand the nature of the business, or by including this provision they are sharing that their agenda is not the overt one disclosed," says Jack Biddle of Novak Biddle Venture Partners. What Washington needs to understand is that bank-style regulation could destroy the culture that created the microprocessor.
Oh god they might have to fill out some paperwork! The horror!
Also, a "jewel" of the American economy? These are the same guys who brought us pets.com and flooze.com in the last decade. Obviously investors should be able to waste their money if they want too. And VCs are usually not hyper leveraged (as far as I know), and it seems like it would be a good idea to make sure that everything is at least being monitored. It's always possible that some kind of shady stuff could move to venture capital funds in the future if other forms of investment become more closely regulated.
posted by delmoi at 11:11 PM on April 8, 2009
Oh god they might have to fill out some paperwork! The horror!
Also, a "jewel" of the American economy? These are the same guys who brought us pets.com and flooze.com in the last decade. Obviously investors should be able to waste their money if they want too. And VCs are usually not hyper leveraged (as far as I know), and it seems like it would be a good idea to make sure that everything is at least being monitored. It's always possible that some kind of shady stuff could move to venture capital funds in the future if other forms of investment become more closely regulated.
posted by delmoi at 11:11 PM on April 8, 2009
Since the dot-com bubble was all publicly-traded companies, I'd say no, they didn't have much to do with it at all.
posted by GuyZero at 11:11 PM on April 8, 2009 [1 favorite]
posted by GuyZero at 11:11 PM on April 8, 2009 [1 favorite]
The rest of us should ask why Washington is targeting a jewel of the American economy that had nothing to do with the housing bubble.
Amen.
posted by KokuRyu at 11:14 PM on April 8, 2009
Amen.
posted by KokuRyu at 11:14 PM on April 8, 2009
Nerf foam gun and foosball table makers are too big to fail. We must act now.
posted by Blazecock Pileon at 11:15 PM on April 8, 2009 [4 favorites]
posted by Blazecock Pileon at 11:15 PM on April 8, 2009 [4 favorites]
The Obama administration wants to regulate venture capital firms to prevent systemic risks. Silicon Valley residents are scratching their heads and asking: What risks? The rest of us should ask why Washington is targeting a jewel of the American economy that had nothing to do with the housing bubble.
gyob, a bit?
posted by slater at 11:42 PM on April 8, 2009 [1 favorite]
gyob, a bit?
posted by slater at 11:42 PM on April 8, 2009 [1 favorite]
It can't be wrong if Obama is doing it.
posted by Krrrlson at 11:46 PM on April 8, 2009 [2 favorites]
posted by Krrrlson at 11:46 PM on April 8, 2009 [2 favorites]
Since the dot-com bubble was all publicly-traded companies, I'd say no
Tell that to this guy
posted by FuManchu at 11:51 PM on April 8, 2009
Tell that to this guy
posted by FuManchu at 11:51 PM on April 8, 2009
The regulations Geithner is considering are absurd anyhow. Impose them based on size? All you'll get are rolled eyes and more and smaller funds with the same limited partners.
posted by christhelongtimelurker at 11:56 PM on April 8, 2009
posted by christhelongtimelurker at 11:56 PM on April 8, 2009
If Obama takes away the fridge with the free diet sodas, I'm turning Republican.
posted by Blazecock Pileon at 11:57 PM on April 8, 2009 [6 favorites]
posted by Blazecock Pileon at 11:57 PM on April 8, 2009 [6 favorites]
The dotcom bubble was a symptom, not a cause, of global instability. The cause is too much money being provided at far too low rates, combined with new banking and insurance structures that allow a nearly unlimited money multiplier through sleight-of-bookkeeping. Liquidity seeks inflation, and stocks were where the inflation was in the late 90s. Later on, the housing bubble was caused by the exact same thing.
VC's don't invent 'wealth' from nothing: they're true investors. No derivative structures, no conjuring of money from thin air. The very last people we want to be choking are these guys -- they find and fund talent, and make a profit doing so. They create wealth for everyone, not just themselves.
Blaming the dotcom bubble on them is like blaming the river for the lake flooding -- it's the rain, stupid.
posted by Malor at 11:59 PM on April 8, 2009 [11 favorites]
VC's don't invent 'wealth' from nothing: they're true investors. No derivative structures, no conjuring of money from thin air. The very last people we want to be choking are these guys -- they find and fund talent, and make a profit doing so. They create wealth for everyone, not just themselves.
Blaming the dotcom bubble on them is like blaming the river for the lake flooding -- it's the rain, stupid.
posted by Malor at 11:59 PM on April 8, 2009 [11 favorites]
These are the same guys who brought us pets.com and flooze.com in the last decade.
The 90s were insane, it's true, but there were a few other things that got funded besides pets.com. Having worked for a few companies that operated on VC money (even dot-com boom VC money) and yet provided useful services (and that all still operate today), I'm somewhat confident you could even say the lion's share of that investment wasn't wasted.
Actually, even if you just discard the business successes, I'm not sure it was wasted. Sure, a lot of the capital spent was sucked up by smooth talkers, lots of it was funneled to Madison avenue, and maybe some of it was even actually burnt in the proverbial gold-plated trash can in the lobby. But it also hired and introduced millions to the web and its underlying technology, it drove bandwidth buildouts, it paid for hardware and hardware development, and we probably really are richer as a society because of all the investment money that got spent, even where investors never saw a cent come directly back.
And when it all crashed, did we need massive publically-funded bailouts? Not really. The investors in Pets.com and webvan.com lost their money. That was it. People lost their jobs and it was a brutal market if you'd worked in tech because of all the competition, but the taxes they weren't any longer paying weren't going to fill a giant hole of unknown size. As the article notes, we stress tested this part of the system from 2000-2002.
Preventing systemic risk seems like a decent general principle, but I agree with the article: it's a headscratcher as why they'd single out the VCs as posing this kind of risk.
Considering all the more pressing and reasonably obvious problems, the only reason I can think anybody would want to do this is that everything else looks so hard by comparison, maybe they just want to warm up by fixing something that isn't broken. But I'm hoping to find out this a is a complete misunderstanding and not an actual policy instead, because if it's not, I think this is what's going to shake my faith in the idea of an effective Obama administration.
posted by weston at 12:01 AM on April 9, 2009 [1 favorite]
The 90s were insane, it's true, but there were a few other things that got funded besides pets.com. Having worked for a few companies that operated on VC money (even dot-com boom VC money) and yet provided useful services (and that all still operate today), I'm somewhat confident you could even say the lion's share of that investment wasn't wasted.
Actually, even if you just discard the business successes, I'm not sure it was wasted. Sure, a lot of the capital spent was sucked up by smooth talkers, lots of it was funneled to Madison avenue, and maybe some of it was even actually burnt in the proverbial gold-plated trash can in the lobby. But it also hired and introduced millions to the web and its underlying technology, it drove bandwidth buildouts, it paid for hardware and hardware development, and we probably really are richer as a society because of all the investment money that got spent, even where investors never saw a cent come directly back.
And when it all crashed, did we need massive publically-funded bailouts? Not really. The investors in Pets.com and webvan.com lost their money. That was it. People lost their jobs and it was a brutal market if you'd worked in tech because of all the competition, but the taxes they weren't any longer paying weren't going to fill a giant hole of unknown size. As the article notes, we stress tested this part of the system from 2000-2002.
Preventing systemic risk seems like a decent general principle, but I agree with the article: it's a headscratcher as why they'd single out the VCs as posing this kind of risk.
Considering all the more pressing and reasonably obvious problems, the only reason I can think anybody would want to do this is that everything else looks so hard by comparison, maybe they just want to warm up by fixing something that isn't broken. But I'm hoping to find out this a is a complete misunderstanding and not an actual policy instead, because if it's not, I think this is what's going to shake my faith in the idea of an effective Obama administration.
posted by weston at 12:01 AM on April 9, 2009 [1 favorite]
and general partners.
posted by christhelongtimelurker at 12:02 AM on April 9, 2009
posted by christhelongtimelurker at 12:02 AM on April 9, 2009
To be honest though, this then begs the question, as to why we're lumping 'hedge funds' into one giant category. None of the funds I've worked for, nor the ones I know people at, use leverage. Most funds don't. Hedge funds have actually weathered the downturn pretty well -- lots of capital calls forcing some to close shop, but there haven't been as many of the glorious Amaranth or LTCM blowups lately (which only really happen to the super-leveraged guys anyhow). The Hedge Fund Research index has outperformed the market, though its still down (note that most funds are long-biased, very few claim to be 'market neutral'). So most hedge funds don't behave the way most people think of hedge funds.
At times SV VCs are much more concentrated in a few areas of technology, compared to hedge funds investing globally. Most hedge funds are zero threat to financial stability. If we're trying to regulate capital investments in ill-defined areas, I see no reason why they should escape.
posted by FuManchu at 12:03 AM on April 9, 2009 [1 favorite]
At times SV VCs are much more concentrated in a few areas of technology, compared to hedge funds investing globally. Most hedge funds are zero threat to financial stability. If we're trying to regulate capital investments in ill-defined areas, I see no reason why they should escape.
posted by FuManchu at 12:03 AM on April 9, 2009 [1 favorite]
Could this be about closing a potential loophole? At present, VC firms may not be big enough or leveraged enough to threaten the economy. But could we see risky banks and hedge funds reconstitute themselves as VC firms to avoid regulation?
posted by TheophileEscargot at 12:14 AM on April 9, 2009
posted by TheophileEscargot at 12:14 AM on April 9, 2009
The dotcom bubble was a symptom, not a cause, of global instability. The cause is too much money being provided at far too low rates
Blaming the dotcom bubble on them is like blaming the river for the lake flooding -- it's the rain, stupid.
Hydrometerological processes are driven by solar energy. The "cause" of current global economic instability is poorly regulated capitalism.
The flow of cash and water can cause damage if it is not regulated.
posted by McGuillicuddy at 12:27 AM on April 9, 2009
Blaming the dotcom bubble on them is like blaming the river for the lake flooding -- it's the rain, stupid.
Hydrometerological processes are driven by solar energy. The "cause" of current global economic instability is poorly regulated capitalism.
The flow of cash and water can cause damage if it is not regulated.
posted by McGuillicuddy at 12:27 AM on April 9, 2009
My firm belief is that the dotcom gold rush era that began with the Netscape Ipo in 1995 will end the moment facebook and twitter get priced. After that, no amount of web 3.0 hype is going to restart the VC hose.this is really too bad for companies like Dopplr that have very forward thinking plans.
Too many VC funded companies end up buying other companies funded by the same VC's in deals that leave shareholders scratching their heads. Too many of these companies are not onlt not profitable, they can never become profitable in a way that recoups the investment. But the VC can always create a buyer because of their influence on boards and CEOs of the other companies they started.
posted by Pastabagel at 12:48 AM on April 9, 2009
Too many VC funded companies end up buying other companies funded by the same VC's in deals that leave shareholders scratching their heads. Too many of these companies are not onlt not profitable, they can never become profitable in a way that recoups the investment. But the VC can always create a buyer because of their influence on boards and CEOs of the other companies they started.
posted by Pastabagel at 12:48 AM on April 9, 2009
This needs to be unpacked.
First, only Silicon Valley could be so self-centered to hear a quick comment about venture capital firm regulation and translate that into Silicon Valley being called a systemic risk that needs regulation. True, many IT related startups were, and currently are, located in and around that particular California Valley, but, uhh, there are a great many other companies in the rest of the country doing a lot more than IT work. Venture capital is one of the life blood of all sorts of rather expensive startups.
Second, take a look at what is being proposed. It's mostly a step towards some transparency. Yes, venture capital groups tend to be private in nature, but private investment groups are particularly subject to corruption precisely because they have little if any transparency. Anyone that is a student of economics will tell you that a cornerstone of economic assumptions rests on the requirement of sufficient, if not perfect, information. If transparency is lacking in a sector of the economy, there is risk for another marekt failure due to hidden dangers.
For a bit of balance, I suggest reading beyond the single WSJ opinion piece. If you haven't figured it out, the WSJ is incredibly conservative in its news bias and tends to be critical of all kinds of regulatory suggestions.
Here is what Geithner actually said:
"Accordingly, we recommend that all advisers to hedge funds (and other private pools of capital, including private equity funds and venture capital funds) with assets under management over a certain threshold be required to register with the SEC. All such funds advised by an SEC-registered investment adviser should be subject to investor and counterparty disclosure requirements and regulatory reporting requirements. The regulatory reporting requirements for such funds should require reporting, on a confidential basis, information necessary to assess whether the fund or fund family is so large or highly leveraged that it poses a threat to financial stability."
Starts to sound relatively reasonable, doesn't it?
Here is one example of some additional, probably more balanced, analysis:
For instance, it's not true that venture capital can't have a serious impact on the economy. Just look back to the dot-com years when the unholy alliance between VCs and Wall Street created one of history's greatest speculative bubbles that torpedoed the economy for several years. Yes, the pool of venture capital is small on a relative basis, but it can still have a significant impact that goes well beyond its size.
Also worth remembering is that many of the largest VC investors are public institutions, like universities and public pension funds. More aggressive use of freedom-of-information laws has led to greater disclosures of information about venture capital funds.
But there's room for more. Additional disclosures should take advantage of information VCs already have without creating burdensome new obligations. The industry should standardize the rules for sharing information about the size of funds raised, amounts distributed and the returns they're earning. This can be done without revealing the performance of individual portfolio companies.
No doubt, working out the details won't be simple. But the message to VCs is simple. Walk down the path to greater transparency. Don't create more roadblocks.
posted by Muddler at 1:01 AM on April 9, 2009 [12 favorites]
First, only Silicon Valley could be so self-centered to hear a quick comment about venture capital firm regulation and translate that into Silicon Valley being called a systemic risk that needs regulation. True, many IT related startups were, and currently are, located in and around that particular California Valley, but, uhh, there are a great many other companies in the rest of the country doing a lot more than IT work. Venture capital is one of the life blood of all sorts of rather expensive startups.
Second, take a look at what is being proposed. It's mostly a step towards some transparency. Yes, venture capital groups tend to be private in nature, but private investment groups are particularly subject to corruption precisely because they have little if any transparency. Anyone that is a student of economics will tell you that a cornerstone of economic assumptions rests on the requirement of sufficient, if not perfect, information. If transparency is lacking in a sector of the economy, there is risk for another marekt failure due to hidden dangers.
For a bit of balance, I suggest reading beyond the single WSJ opinion piece. If you haven't figured it out, the WSJ is incredibly conservative in its news bias and tends to be critical of all kinds of regulatory suggestions.
Here is what Geithner actually said:
"Accordingly, we recommend that all advisers to hedge funds (and other private pools of capital, including private equity funds and venture capital funds) with assets under management over a certain threshold be required to register with the SEC. All such funds advised by an SEC-registered investment adviser should be subject to investor and counterparty disclosure requirements and regulatory reporting requirements. The regulatory reporting requirements for such funds should require reporting, on a confidential basis, information necessary to assess whether the fund or fund family is so large or highly leveraged that it poses a threat to financial stability."
Starts to sound relatively reasonable, doesn't it?
Here is one example of some additional, probably more balanced, analysis:
For instance, it's not true that venture capital can't have a serious impact on the economy. Just look back to the dot-com years when the unholy alliance between VCs and Wall Street created one of history's greatest speculative bubbles that torpedoed the economy for several years. Yes, the pool of venture capital is small on a relative basis, but it can still have a significant impact that goes well beyond its size.
Also worth remembering is that many of the largest VC investors are public institutions, like universities and public pension funds. More aggressive use of freedom-of-information laws has led to greater disclosures of information about venture capital funds.
But there's room for more. Additional disclosures should take advantage of information VCs already have without creating burdensome new obligations. The industry should standardize the rules for sharing information about the size of funds raised, amounts distributed and the returns they're earning. This can be done without revealing the performance of individual portfolio companies.
No doubt, working out the details won't be simple. But the message to VCs is simple. Walk down the path to greater transparency. Don't create more roadblocks.
posted by Muddler at 1:01 AM on April 9, 2009 [12 favorites]
Yeh, these proposals have been kicking about for a month or so now, and after a bunch of mails from folks I know who work in Venture Capital I was wondering when this thing was gonna mainstream.
The SEC been trying to push this regulation forward in the hedge fund industry for several years, but without success, so now it seems they're trying to widen the net, hoping to get support from additional parties - note they're going after another pariah business - private equity - as well. Still, this entire thing is very, very embryonic at present; note they haven't yet specified the size of the venture capital funds that would need to be registered.
It seems there are two aspects of interest here to Venture Capital; those that take equity stakes and the bank quoted that provides short term financing. They differ in terms of where each will be in the startup business cycle.
If the firm is a true start up, it won't have significant revenue, therefore an organisation like Silicon Valley Bank (quoted in the article) won't be involved. It seems this organisation provides a role more akin to traditional factoring than anything else, so clearly bank rules on disclosure / regulation / etc should and in fact already apply. Hard to see how this new regulation would improve things.
On the other hand, if we're talking about the traditional role of Venture Capitalists clearly SEC disclosure shouldn't apply. By doing so these firms might inadvertently reveal trade secrets of the firms they've invested in, albeit in an indirect manner. This might come about by either disclosing management or staff or even SEC review and confirmation of information periodically sent to investors.
Its hard to see how this thing will go forward as is. I've got friends who fund start ups out there, and they are going ballistic, working their contacts and even going so far as to setup fighting funds to get lobbyists on board.
posted by Mutant at 1:03 AM on April 9, 2009 [1 favorite]
The SEC been trying to push this regulation forward in the hedge fund industry for several years, but without success, so now it seems they're trying to widen the net, hoping to get support from additional parties - note they're going after another pariah business - private equity - as well. Still, this entire thing is very, very embryonic at present; note they haven't yet specified the size of the venture capital funds that would need to be registered.
It seems there are two aspects of interest here to Venture Capital; those that take equity stakes and the bank quoted that provides short term financing. They differ in terms of where each will be in the startup business cycle.
If the firm is a true start up, it won't have significant revenue, therefore an organisation like Silicon Valley Bank (quoted in the article) won't be involved. It seems this organisation provides a role more akin to traditional factoring than anything else, so clearly bank rules on disclosure / regulation / etc should and in fact already apply. Hard to see how this new regulation would improve things.
On the other hand, if we're talking about the traditional role of Venture Capitalists clearly SEC disclosure shouldn't apply. By doing so these firms might inadvertently reveal trade secrets of the firms they've invested in, albeit in an indirect manner. This might come about by either disclosing management or staff or even SEC review and confirmation of information periodically sent to investors.
Its hard to see how this thing will go forward as is. I've got friends who fund start ups out there, and they are going ballistic, working their contacts and even going so far as to setup fighting funds to get lobbyists on board.
posted by Mutant at 1:03 AM on April 9, 2009 [1 favorite]
The flow of cash and water can cause damage if it is not regulated.
Sure, but these guys don't have anything to do with that. They're just investors. The systemic instability stems from an excess of liquidity, of things that look and act like money, but aren't.
These guys were just conduits for the cash that was being shoveled at them by the system. They didn't, and don't, cause any problems by themselves. Reduce the cash inputs and they're fine. They're not being stupid, and they're not conjuring money from nothing, they're just doing the same old thing we've done for 200+ years, investing in speculative ventures. "Venture capitalists" is a new word for one of the very oldest things that post-barter economies do.
No venture capitalist failure could ever take down the system, because what they're doing is healthy and normal. They don't deal in debt, and don't create instability. The only danger is to themselves and their financial backers, and everyone involved knows they could face a total loss of assets going in.
posted by Malor at 1:07 AM on April 9, 2009
Sure, but these guys don't have anything to do with that. They're just investors. The systemic instability stems from an excess of liquidity, of things that look and act like money, but aren't.
These guys were just conduits for the cash that was being shoveled at them by the system. They didn't, and don't, cause any problems by themselves. Reduce the cash inputs and they're fine. They're not being stupid, and they're not conjuring money from nothing, they're just doing the same old thing we've done for 200+ years, investing in speculative ventures. "Venture capitalists" is a new word for one of the very oldest things that post-barter economies do.
No venture capitalist failure could ever take down the system, because what they're doing is healthy and normal. They don't deal in debt, and don't create instability. The only danger is to themselves and their financial backers, and everyone involved knows they could face a total loss of assets going in.
posted by Malor at 1:07 AM on April 9, 2009
Jesus, SV is almost the only home-grown non-service industry that has actually been working for the US and in the US for the last two decades. They shouldn't consider doing a thing that might possibly alter its dynamics right now: instead they should make the auto industry go to Sand Hill Road and compete for their next round of funding.
posted by Your Time Machine Sucks at 3:09 AM on April 9, 2009 [1 favorite]
posted by Your Time Machine Sucks at 3:09 AM on April 9, 2009 [1 favorite]
Also, it is instructive to look at what the dot-com crash had in common with the current crash, but a financier like Geithner is joking if he implies that what he noticed is the fact that VC firms are sorta like hedge funds, in a way, if you really think about it, dude. Without mass-market media selling securities directly to plain folks via a constant stream of greed-crazy bullshit, and ratings agencies falsifying ratings, the dot-com crash would have been a phenomenon which primarily affected its own industry, and I can promise you that most people who really worked at startups in the actual Silicon Valley at that time were unsettled by the spectacle of their own family members telling them to dump the stocks of the startups they had put their heart into and get it into eToys ASAP, you're going to miss out, OMG. If the VCs were able to bring that outcome to pass all on their own, it is because the press and the ratings agencies are totally corrupt.
Regarding the innocuousness of transparency, it sounds awesome until you consider the fact that the US government is completely opaque, and actually getting more so if anyone thought that was still possible, and it leaks like crazy, and the people in it who would be receiving more info about startups are cheek-to-jowl with the financial industry. If the government is convinced that it would be a good idea for it to get in there a little more, it has to start by extensively cleaning up its own act or we're going to end up with even more oligarchical mysteries than we're currently experiencing.
posted by Your Time Machine Sucks at 3:51 AM on April 9, 2009
Regarding the innocuousness of transparency, it sounds awesome until you consider the fact that the US government is completely opaque, and actually getting more so if anyone thought that was still possible, and it leaks like crazy, and the people in it who would be receiving more info about startups are cheek-to-jowl with the financial industry. If the government is convinced that it would be a good idea for it to get in there a little more, it has to start by extensively cleaning up its own act or we're going to end up with even more oligarchical mysteries than we're currently experiencing.
posted by Your Time Machine Sucks at 3:51 AM on April 9, 2009
Could we find a way to regulate the systemic risk of blogosphere echo chamber teapot to tornado bubbles? Perhaps an organization called the Cred that could step in and prevent story inflation?
posted by srboisvert at 5:00 AM on April 9, 2009 [2 favorites]
posted by srboisvert at 5:00 AM on April 9, 2009 [2 favorites]
What Washington needs to understand is that bank-style regulation could destroy the culture that created the microprocessor.
Oops, wrongo, Mr Freeman! Those were defence contractors! Good try though, maybe you could do some research and then you could be a real journalist someday! Your little "jewel of the American economy" is generally a giant pipe of money flowing from people with too much of it to people who don't know what they're doing, directed by people who are just as clued-in as you about the real context of technological development.
posted by Super Hans at 5:01 AM on April 9, 2009 [2 favorites]
Oops, wrongo, Mr Freeman! Those were defence contractors! Good try though, maybe you could do some research and then you could be a real journalist someday! Your little "jewel of the American economy" is generally a giant pipe of money flowing from people with too much of it to people who don't know what they're doing, directed by people who are just as clued-in as you about the real context of technological development.
posted by Super Hans at 5:01 AM on April 9, 2009 [2 favorites]
Also, a "jewel" of the American economy? These are the same guys who brought us pets.com and flooze.com in the last decade.
Are you really that dense? These are also the same guys that brought you little-known companies like Apple, Intel, HP, Sun, Oracle... if it weren't for venture capital, there would not have been a information revolution... the Internet would still be under the auspices of the military and you'd be doing math with a slide rule.
posted by Civil_Disobedient at 5:45 AM on April 9, 2009 [4 favorites]
Are you really that dense? These are also the same guys that brought you little-known companies like Apple, Intel, HP, Sun, Oracle... if it weren't for venture capital, there would not have been a information revolution... the Internet would still be under the auspices of the military and you'd be doing math with a slide rule.
posted by Civil_Disobedient at 5:45 AM on April 9, 2009 [4 favorites]
Being a Wall Street Journal op-ed, I assume this is some sort of straw man singing "If I Only Had a Brain."
WSJ has been known to quote reader responses on blogs as though they are informative sources.
In other words, I'm not convinced that Obama is going to restrict this without a little bit more of the picture. (P.S., I'm not saying it's true, but single-sided opinion columns aren't enough to convince me.)
posted by dances_with_sneetches at 5:59 AM on April 9, 2009
WSJ has been known to quote reader responses on blogs as though they are informative sources.
In other words, I'm not convinced that Obama is going to restrict this without a little bit more of the picture. (P.S., I'm not saying it's true, but single-sided opinion columns aren't enough to convince me.)
posted by dances_with_sneetches at 5:59 AM on April 9, 2009
what dances_with_sneetches said.
Also, the WSJ is to the financial oligarchy what Pravda was to the USSR. They are far from objective on these matters, as we've found to our dismay.
posted by Artful Codger at 6:40 AM on April 9, 2009 [1 favorite]
Also, the WSJ is to the financial oligarchy what Pravda was to the USSR. They are far from objective on these matters, as we've found to our dismay.
posted by Artful Codger at 6:40 AM on April 9, 2009 [1 favorite]
Oops, wrongo, Mr Freeman! Those were defence contractors! Good try though, maybe you could do some research and then you could be a real journalist someday!
Defense contractors developed a microprocessor for the F-14, and Intel developed the 4004 for commercial applications simultaneously. I guess you're right that there was no real benefit to the 4004 coming from the US tech industry, since the US government allowed their chip to be publicized as early as 1997 and we definitely would have seen it being used in consumer technology by now.
posted by Your Time Machine Sucks at 6:46 AM on April 9, 2009 [3 favorites]
Defense contractors developed a microprocessor for the F-14, and Intel developed the 4004 for commercial applications simultaneously. I guess you're right that there was no real benefit to the 4004 coming from the US tech industry, since the US government allowed their chip to be publicized as early as 1997 and we definitely would have seen it being used in consumer technology by now.
posted by Your Time Machine Sucks at 6:46 AM on April 9, 2009 [3 favorites]
The rest of us should ask why
You're doing it wrong.
posted by kittens for breakfast at 7:02 AM on April 9, 2009
You're doing it wrong.
posted by kittens for breakfast at 7:02 AM on April 9, 2009
Too many VC funded companies end up buying other companies funded by the same VC's in deals that leave shareholders scratching their heads.
No kidding; I saw VCs repeatedly kill their own startups, on purpose.
I never figured out the entire scheme, but one of the basic deals was this: invest in Company A, which provides some form of high-tech service.
Now, identify several additional startups which use some service that Company A is trying to provide (call them Companies B through F). Fund them for a couple million each, but require (as a condition of the funding) that they buy the service being provided by Company A regardless of how it's priced.
Company A now has cash flowing in, so prepare to IPO or buyout. Pursue additional funding for Companies B through F to keep the cash flowing, but add zero dollars yourself. The idea here is to siphon your money back out of Companies B through F indirectly by using them to prop up the profitability of Company A, thereby increasing the value of your stake in A. Basically, you're using the secondary investors in those subsidiary companies as suckers to get your own value back out of the system.
Once you're able to cash out on Company A, let Companies B through F die. They were never intended to survive long enough to IPO or buyout; they were only supported in order to keep Company A alive long enough. Besides, you probably need the "loss" you've supposedly sustained by their collapse.
...remember that "cloud" services company started by Andreesen? That was Company A in at least a half dozen cases I'm aware of.
posted by aramaic at 7:17 AM on April 9, 2009 [8 favorites]
No kidding; I saw VCs repeatedly kill their own startups, on purpose.
I never figured out the entire scheme, but one of the basic deals was this: invest in Company A, which provides some form of high-tech service.
Now, identify several additional startups which use some service that Company A is trying to provide (call them Companies B through F). Fund them for a couple million each, but require (as a condition of the funding) that they buy the service being provided by Company A regardless of how it's priced.
Company A now has cash flowing in, so prepare to IPO or buyout. Pursue additional funding for Companies B through F to keep the cash flowing, but add zero dollars yourself. The idea here is to siphon your money back out of Companies B through F indirectly by using them to prop up the profitability of Company A, thereby increasing the value of your stake in A. Basically, you're using the secondary investors in those subsidiary companies as suckers to get your own value back out of the system.
Once you're able to cash out on Company A, let Companies B through F die. They were never intended to survive long enough to IPO or buyout; they were only supported in order to keep Company A alive long enough. Besides, you probably need the "loss" you've supposedly sustained by their collapse.
...remember that "cloud" services company started by Andreesen? That was Company A in at least a half dozen cases I'm aware of.
posted by aramaic at 7:17 AM on April 9, 2009 [8 favorites]
My experiences with VC stuff in the 90s heightened my awareness of the level of creativity to which the accountant's art can aspire, and I beleive that it was from VC-funded companies at that time that the art spread to the rest of the conomy, first notably via Enron and thence to the housing bubble.
As the liquidity chased inflation, the accounting practices that artificially and unethically sustained the conditions of inflation traveled with it. Those practices seem to stem form Valley VC culture and they must not continue.
posted by mwhybark at 8:00 AM on April 9, 2009
As the liquidity chased inflation, the accounting practices that artificially and unethically sustained the conditions of inflation traveled with it. Those practices seem to stem form Valley VC culture and they must not continue.
posted by mwhybark at 8:00 AM on April 9, 2009
A lot of these VC funds are just guys who made it rich in startups pooling their money together to help other startups. Think of it as a private investment club. The whole point of a startup is to create a new innovative product faster than the big companies can so they can capture a new market and get rich. The whole point is secrecy. It doesn't work if there is transparency. If Cisco finds out that you're funding a startup that has come up with some unusual new way to do networking, they are going to pounce on it and your company won't have a chance. People just won't bother creating VC funds anymore. The risk is still their but the potential reward is gone.
I've worked for a couple of startups now that were funded by small VC firms. It was all investment of partner's money. Sometimes there was debt in the form of regular bank loans if we needed to quickly build product for a potential new customer. The VCs hated the debt, though, because it cut into their potential profit.
Silicon Valley has created some of the largest success stories in the US: Google, Yahoo, AMD, Intel, Cisco. Cities all over the world are ruthlessly trying to recreate Silicon Valley and in most cases are failing.
Why, would you want to mess with this???
posted by eye of newt at 9:00 AM on April 9, 2009
I've worked for a couple of startups now that were funded by small VC firms. It was all investment of partner's money. Sometimes there was debt in the form of regular bank loans if we needed to quickly build product for a potential new customer. The VCs hated the debt, though, because it cut into their potential profit.
Silicon Valley has created some of the largest success stories in the US: Google, Yahoo, AMD, Intel, Cisco. Cities all over the world are ruthlessly trying to recreate Silicon Valley and in most cases are failing.
Why, would you want to mess with this???
posted by eye of newt at 9:00 AM on April 9, 2009
My firm belief is that the dotcom gold rush era that began with the Netscape Ipo in 1995 will end the moment facebook and twitter get priced. After that, no amount of web 3.0 hype is going to restart the VC hose.
Maybe not the VC firehose we had in the late 90s (and to some degree recently). And I agree that VCs aren't always as sharp in their picks as they make out to be. But for every famous overhyped example, there are relevant, interesting, and sometimes even profitable businesses plugging away.
(Also, I don't know that Facebook's caché is empty. They seem to have a shot at succeeding in their bid to become The social utility. If so, they are no more a bubble property than Amazon was in the 90s.)
Just look back to the dot-com years when the unholy alliance between VCs and Wall Street created one of history's greatest speculative bubbles that torpedoed the economy for several years.
I don't understand what that "just look" is supposed to prove about systemic risk. But then again, like I said above, I'm of the opinion the dot-com years weren't just a speculative bubble -- certainly a boom, definitely there was speculation, but stuff got built and people got educated in a technology that actually provides real productivity gains and can be legitimately looked at as wealth.
And there was a bust cycle but I don't know about "it torpedoed the economy" -- sure, the boom ended, as they all do, but was there something specific about the boom itself that hamstrung everybody? Most of the effects were contained to the industry itself, and I don't recall billion, let alone trillion, dollar figures thrown around in dicussion of bailouts.
There are certainly VCs who do not understand a business well enough and will naively run it into the ground. And there are certainly VCs who have their own reasons for investing that are potentially, if perversely, at odds with the success of some businesses they invest in. These examples work as cautionary tales to be careful about who you take money from, and perhaps even against naive worship of the system, but it's still not clear to me how this kind of thing becomes a systemic risk.
posted by weston at 10:44 AM on April 9, 2009 [1 favorite]
Maybe not the VC firehose we had in the late 90s (and to some degree recently). And I agree that VCs aren't always as sharp in their picks as they make out to be. But for every famous overhyped example, there are relevant, interesting, and sometimes even profitable businesses plugging away.
(Also, I don't know that Facebook's caché is empty. They seem to have a shot at succeeding in their bid to become The social utility. If so, they are no more a bubble property than Amazon was in the 90s.)
Just look back to the dot-com years when the unholy alliance between VCs and Wall Street created one of history's greatest speculative bubbles that torpedoed the economy for several years.
I don't understand what that "just look" is supposed to prove about systemic risk. But then again, like I said above, I'm of the opinion the dot-com years weren't just a speculative bubble -- certainly a boom, definitely there was speculation, but stuff got built and people got educated in a technology that actually provides real productivity gains and can be legitimately looked at as wealth.
And there was a bust cycle but I don't know about "it torpedoed the economy" -- sure, the boom ended, as they all do, but was there something specific about the boom itself that hamstrung everybody? Most of the effects were contained to the industry itself, and I don't recall billion, let alone trillion, dollar figures thrown around in dicussion of bailouts.
Too many VC funded companies end up buying other companies funded by the same VC's in deals that leave shareholders scratching their heads.No kidding; I saw VCs repeatedly kill their own startups, on purpose.
There are certainly VCs who do not understand a business well enough and will naively run it into the ground. And there are certainly VCs who have their own reasons for investing that are potentially, if perversely, at odds with the success of some businesses they invest in. These examples work as cautionary tales to be careful about who you take money from, and perhaps even against naive worship of the system, but it's still not clear to me how this kind of thing becomes a systemic risk.
posted by weston at 10:44 AM on April 9, 2009 [1 favorite]
Why do they want to mess with it? Partly a lack of understanding. This Administration, this country, seriously lacks financial understanding. Partly the anti-capitalist, class warfare tool that's being bandied about to create political capital (it's weird, really, people keep asking what the next bubble is and here's the answer: it's government, in the form of Govt spending on bailouts and nationalizations, PPIP, and future stimulus packages, over-extension of govt in private affairs, and the carte blanche given to Obama). Not that I mind, since I voted for him, but the amount of trust being injected into the mere chance that the government will save us all is freaking scary. It's not all bad, of course. But venture capital uses such small amounts of capital that the chances of them posing a financial systemic threat is laughable. Now, if they accidentally create a bioweapon that kills us all, that's another story.
posted by SeizeTheDay at 12:04 PM on April 9, 2009
posted by SeizeTheDay at 12:04 PM on April 9, 2009
t's still not clear to me how this kind of thing becomes a systemic risk.
I don't see that it is. I'm not even sure how it could become one; seriously, how would that work?
...although, I suppose, one might have said that about derivatives once upon a time and look where that got us.
posted by aramaic at 12:48 PM on April 9, 2009
I don't see that it is. I'm not even sure how it could become one; seriously, how would that work?
...although, I suppose, one might have said that about derivatives once upon a time and look where that got us.
posted by aramaic at 12:48 PM on April 9, 2009
This Administration, this country, seriously lacks financial understanding.
That's the same unfortunate conclusion that I'm coming to as well. I had high hopes for the Obama administration, but this really looks like they have no idea what they're doing. This kind of crap doesn't help, either.
posted by Civil_Disobedient at 12:54 PM on April 9, 2009
That's the same unfortunate conclusion that I'm coming to as well. I had high hopes for the Obama administration, but this really looks like they have no idea what they're doing. This kind of crap doesn't help, either.
posted by Civil_Disobedient at 12:54 PM on April 9, 2009
Once you're able to cash out on Company A, let Companies B through F die. They were never intended to survive long enough to IPO or buyout; they were only supported in order to keep Company A alive long enough. Besides, you probably need the "loss" you've supposedly sustained by their collapse.
But that's not how it works. Yes, I've seen VCs urge (and I suppose in some cases they might require) a "Portfolio Company B" buy from "Portfolio Company A" but the strategy you lay out fails because a VC's compensation (apart from typically small management fees) hinges on the total return on a fund. Let's say a VC firm raises a $100M fund. They have a defined time period in which they have to invest that fund and then the gravy they make off that fund depends on the portfolio exceeding a specified rate of return over time. While it's true that a Netscape or an Amazon having a spectacular IPO can offset several other companies in the fund that fail or underperform, the notion that a VC firm would invest in "Losers B through F" to essentially launder their own money to make "Winner A" look good doesn't pencil out, would be a doomed strategy, and is cuckoo.
posted by donovan at 2:19 PM on April 9, 2009
But that's not how it works. Yes, I've seen VCs urge (and I suppose in some cases they might require) a "Portfolio Company B" buy from "Portfolio Company A" but the strategy you lay out fails because a VC's compensation (apart from typically small management fees) hinges on the total return on a fund. Let's say a VC firm raises a $100M fund. They have a defined time period in which they have to invest that fund and then the gravy they make off that fund depends on the portfolio exceeding a specified rate of return over time. While it's true that a Netscape or an Amazon having a spectacular IPO can offset several other companies in the fund that fail or underperform, the notion that a VC firm would invest in "Losers B through F" to essentially launder their own money to make "Winner A" look good doesn't pencil out, would be a doomed strategy, and is cuckoo.
posted by donovan at 2:19 PM on April 9, 2009
All I can say is, famous VC (the funder) walks in, and twenty minutes later we're told to use Company A for all our compute needs. This more than triples our already-significant IT expenses for no apparent reason, renders already-purchased infrastructure irrelevant and burns some fairly valuable bridges in the process. In the ensuing weeks, it is determined through drinks, dinner & weekend sporting events that Mr. VC had that same chat with at minimum five other startups, probably more.
Dunno why he wanted to increase our burn rate, but that's certainly what happened. My proposal above is an attempt to make sense of why he did that; I'm guessing it wasn't a complicated scheme to get used Aerons, but maybe he wanted to rip the copper wires out of the wall once we were gone?
posted by aramaic at 3:05 PM on April 9, 2009
Dunno why he wanted to increase our burn rate, but that's certainly what happened. My proposal above is an attempt to make sense of why he did that; I'm guessing it wasn't a complicated scheme to get used Aerons, but maybe he wanted to rip the copper wires out of the wall once we were gone?
posted by aramaic at 3:05 PM on April 9, 2009
donovan -- I've understood that most VCs have an successful exit rate of 1/10 to 1/7, whether acquisition or IPO. That will still get you up to a 10%+ IRR. The other companies either fail or get sold at a price close to what was paid. So yea, ensuring that one company has hockey-stick revenues would totally be worth sacrificing the other companies.
posted by FuManchu at 3:58 PM on April 9, 2009
posted by FuManchu at 3:58 PM on April 9, 2009
In the 90's when I worked at several dot-com startups, the talk among company principals and employees frequently referred to the "V.C's". One day a co-worker of mine smirkingly asked me if I had noticed how close the acronym "V.C.'s" sounded like "feces".
posted by telstar at 12:24 AM on April 10, 2009 [1 favorite]
posted by telstar at 12:24 AM on April 10, 2009 [1 favorite]
aramaic, I'm not disputing what you observed at your startup--that sounds typical, a partner thumping around promoting a company to other portfolio companies (and hopefully all sorts of other potential buyers). What I am disputing is that this is a strategy that involves intentionally sacrificing multipel companies for the success of one.
So yea, ensuring that one company has hockey-stick revenues would totally be worth sacrificing the other companies.
I've seen VCs be greedy, stupid, and make bad decisions as well as force exits that were suboptimal for the company, but made sense from a fund POV. My point, though, was that I've never seen or heard in private anything that would indicate that the strategy you outlined is a real one. Not to say you don't get a VC talking "synergies" etc etc, my core point is that simply having a small fleet of startups buy from another one of my startups is not ever going to be enough to turn that startup into a winner, nor are you as a VC going to be able to exert ironclad control over your other startups like that. Except for at the earliest seed stage, there are typically more than one VC funding a startup.
posted by donovan at 10:16 AM on April 10, 2009
So yea, ensuring that one company has hockey-stick revenues would totally be worth sacrificing the other companies.
I've seen VCs be greedy, stupid, and make bad decisions as well as force exits that were suboptimal for the company, but made sense from a fund POV. My point, though, was that I've never seen or heard in private anything that would indicate that the strategy you outlined is a real one. Not to say you don't get a VC talking "synergies" etc etc, my core point is that simply having a small fleet of startups buy from another one of my startups is not ever going to be enough to turn that startup into a winner, nor are you as a VC going to be able to exert ironclad control over your other startups like that. Except for at the earliest seed stage, there are typically more than one VC funding a startup.
posted by donovan at 10:16 AM on April 10, 2009
donovan -- Yea, you're absolutely right actually. Though I could imagine pressure to work with other portfolio companies, I withdraw my support for the conspiracy theory.
posted by FuManchu at 1:32 AM on April 11, 2009
posted by FuManchu at 1:32 AM on April 11, 2009
Jesus, SV is almost the only home-grown non-service industry that has actually been working for the US and in the US for the last two decades. They shouldn't consider doing a thing that might possibly alter its dynamics right now: instead they should make the auto industry go to Sand Hill Road and compete for their next round of funding.
The entire pool of money in venture capital funds (like $30 billion) right now is enough to run GM for a single quarter. The VC industry is rather small, and some VCs have been complaining about there actually being too much money in play.
aramaic, I'm not disputing what you observed at your startup--that sounds typical, a partner thumping around promoting a company to other portfolio companies (and hopefully all sorts of other potential buyers). What I am disputing is that this is a strategy that involves intentionally sacrificing multipel companies for the success of one.
Why not? If they only need to exit 1/10, killing five companies to exit one would actually be a pretty good deal, especially if the companies didn't quite look like long-term winners anyway.
I'm surprised at how many people buy into the VC worship around here. Get over it. Fried Wilson, a VC (who blogs at avc.com) has had some posts up showing most VC funds aren't even profitable lately (which he blames on too much money chasing too few opportunities)
posted by delmoi at 1:10 AM on April 12, 2009
The entire pool of money in venture capital funds (like $30 billion) right now is enough to run GM for a single quarter. The VC industry is rather small, and some VCs have been complaining about there actually being too much money in play.
aramaic, I'm not disputing what you observed at your startup--that sounds typical, a partner thumping around promoting a company to other portfolio companies (and hopefully all sorts of other potential buyers). What I am disputing is that this is a strategy that involves intentionally sacrificing multipel companies for the success of one.
Why not? If they only need to exit 1/10, killing five companies to exit one would actually be a pretty good deal, especially if the companies didn't quite look like long-term winners anyway.
I'm surprised at how many people buy into the VC worship around here. Get over it. Fried Wilson, a VC (who blogs at avc.com) has had some posts up showing most VC funds aren't even profitable lately (which he blames on too much money chasing too few opportunities)
posted by delmoi at 1:10 AM on April 12, 2009
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Did the VCs perchance have something to do with that?
(Not that this means they need the same kind of regulation as hedge funds, but just sayin)
posted by sien at 11:08 PM on April 8, 2009