Recently in Regulation, Taxes & Spending Category

BusinessWeek asked some CEOs what they thought of Obama's performance so far and here's the blurb they quoted for me:

The evidence would appear to suggest not:

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.

The confusion began when Treasury Secretary Timothy Geithner recently told Congress that large venture capital (VC) firms should be forced to register with the Securities and Exchange Commission (SEC), and submit regular reports on their investors and portfolios. Data collected by the SEC would then be shared with a new risk regulator to ensure that VCs aren't "a threat to financial stability."

Since then, venture investors have been trying to solve the mystery of how they could possibly threaten the financial system. Their work involves very little banking. Venture firms raise equity from wealthy investors to buy ownership stakes in small companies. The VCs and the companies in which they invest use little or no debt.

James Freeman gets it:

If our economic system is to thrive, venture capital is exactly the place where we have to encourage risk. In pursuit of innovations that will enrich themselves and the world, employees at start-ups accept low pay and reputational risk, while well-heeled investors accept the possibility of losing every nickel of their investment.

Attempts to limit risk pose a systemic threat to American technology. Venture capitalists, mainly veterans of the tech industry, are deeply involved in the companies they back, often helping to recruit each of the key employees at a start-up. This hands-on feature of venture investing means that innovative companies and their backers tend to cluster in areas like Silicon Valley. If the VCs move offshore, that's probably where the next generation of companies will be born.

I'm hoping Geithner's comment is born of ignorance, not calculation, for if it's the latter then we're in trouble.

UPDATE: comScore's Gian Fulgoni has some VC quotes on this.

Here's a cautionary tale from Thomas Hazlett in the FT on the problem with central planning of the airwaves and how political decisions made by the collusion of policy makers with business special interests can severely undermine the true interests of the public. Sadly, it is a lesson that, like the analog switchoff, few have noticed. Maybe THAT is the real cautionary tale.

The whole piece is worth reading but some summary parts:

When, in 1986, cell-phone makers and public safety agencies asked the Federal Communications Commission for a shot at using scores of idle TV channels, politically powerful TV stations quashed the idea. They hurriedly hatched a reason: extra frequencies had to be reserved for "advanced television." America, then reeling from Japan's emergence as a consumer electronics powerhouse, needed to develop its own cool video application and dominate the world. ...

In extending life-support to DTV signals that hog hugely valuable frequencies, consumers lose hundreds of billions worth of wireless service. The bandwidth available to iPhones, Blackberrys and GPhones and other emerging technologies would double were TV air waves to accommodate mobile apps as requested in 1985. ...

But here is the bottom line: the most valuable air waves on God's Green Earth will continue to be occupied by digital TV signals that few watch and none need, to provide a prop for a cosy deal between policy makers and broadcasters. That is the worst way to use radio spectrum in the Information Age.

UPDATE: Reid expands on his ideas in this TechCrunch piece. He still hasn't won me over on point 3 though.

Here is a great column by in the Washington Post making the point that entrepreneurship is a major engine of growth for this country and it deserves some stimulus.

Entrepreneurs are the fertile soil for job growth and recovery. Small companies represent 99.7 percent of all employer firms, Commerce Department data show. They pay nearly 45 percent of U.S. private payroll and have generated 60 to 80 percent of net new jobs annually over the past decade.

There are few people who are more credible or smarter when it comes to technology entrepreneurship than Reid, who has PayPal and LinkedIn on his resume and, as he mentions in this piece, has invested in over 60 companies. I should also mention that he is an investor and board member of Six Apart -- and a friend.

I think he is right on when he makes the point that although there is some focus in the stimulus package on scientific research, that "new ventures -- not merely new technologies -- need to be championed as the course to stability."

As for Reid's proposals, I would support some and I am more skeptical of others (this would not surprise Reid :) ).

First, he proposes that we "encourage small business with loans. Apply to the United States the micro-lending model that has proved successful in developing countries, extending credit lines of up to $50,000." I would like to hear more about this. There are parts of this I like. The costs of starting a tech business -- an Internet business especially -- are now relatively low and it would be great to have more start-ups get financed by small loans. VC is in a sense the most expensive form of financing, but it has come easy in the past and so entrepreneurs haven't relied on raising money from banks or, heaven forbid, customers (i.e. selling something!) as a means of funding operations as much as they should. So I like the general idea.

However, I'm a bit wary because we saw what artificial incentives for banks to lend to those that couldn't afford mortgages did to the overall credit market, and I wouldn't want this $50k incentive to similarly distort markets. If there is a way to free up lending to start-ups by lowering barriers but without artificial distortions in the credit market, I'm all for it.

Second, he would "welcome foreign innovators" by urging lawmakers to remove "the cap on H-1B visas while imposing a 10 percent payroll tax above and beyond the benchmark salary for any position being filled by holders of such visas." This is the subject for much more discussion but I am strongly in favor of eliminating the cap on H-1Bs. I think it's crazy that this country is severely gating our ability to attract the best and brightest from around the world and Reid is right to focus on this as a severe hindrance to entrepreneurship in this country. I don't like his 10% payroll tax increase, but I'd accept it if it were the only way politically to remove the cap.

Third, "match funds for venture capital and angel investments. Venture firms and investors need financial incentives to invest in companies that create U.S. jobs. What if firms with credible histories could receive as much as $100 million in federal matching funds if their investments create jobs in the United States?" This is my least favorite of his proposals. In the first place, my sense of the angel and VC markets is that there is in fact plenty of money out there still, though this may be changing, and investors don't really need artificial incentives to invest. What they need are returns.

And it's on the liquidity side that investors are having the biggest challenges with unstable and plummeting public financial markets and regulations such as SarBox making it ever harder and expensive for companies to go public. Companies from around the world are now looking elsewhere to list when they used to look only to the NYSE and Nasdaq. There is a whole lot that could be done to improve liquidity options for companies and I'd like to see more focus on this.

Also, I am very skeptical of injecting the federal government into private investing. It will undoubtedly come with strings attached, as so much of the recent government intervention has, and frankly it's not needed. And once a system gets hooked on federal funds, it rarely weans itself off. Finally, "credible" venture funds as a class have not had a challenge raising capital, so this seems to be a solution in search of a problem. The scarce commodity is not private capital but the time and talent of capable investors who should want a full return on their effort rather than giving half of it away. Such a system would actually lower the returns on investors time, which is a zero sum, and probably not be in the best interests of the industry.

(Fred Wilson has a more detailed and eloquent take on this which I endorse.)

If the goal were to infuse more capital into private investing, I'd prefer a different approach. Right now there are a huge number of impediments for individuals to invest in private companies. Reid can invest in 60 companies because he is experienced and is an accredited investor, but most people simply can't invest in these companies by reasons of law, regulation, legal cost, and sheer logistics. Many of these limitations are imposed on people to "protect" them from themselves. Thank goodness we've been preventing people from private investing so that they can keep their money in the public markets! Another classic example of a system that punishes the responsible in an attempt to protect the irresponsible.

I am sensitive to the need to protect less sophisticated investors from shams, but it strikes me that there should be some middle ground between the public market which is easy and open for investors but difficult and expensive for companies and the private market, which imposes fewer restrictions and costs on companies but is much more challenging and restrictive for investors. This, more than anything, restricts the flow of capital to start-ups.

The very purpose of a financial market is to provide capital and liquidity to businesses -- they are not an entitlement for individual investors -- and when they stop serving that purpose effectively we should ask what we can do to fix things. Whether this means lessening the burden on public companies, or loosening the restrictions on private investors, or coming up with a middle way, perhaps by freeing up personal investment in venture funds or creating mutual fund like vehicles -- or all three -- we should be exploring these avenues.

And finally, I have to say that I'm a bit disappointed that there is no comment here on the Obama tax increases. Whether you are for or against the income and capital gains tax increases and the massive implied taxation on the energy sector put forward by President Obama, we should not kid ourselves that these don't come at a cost to entrepreneurship. These taxes will hit many wealthy individuals who fund a lot of start ups and many SMBs that file as individuals -- and capital gains is the return on their investment so higher taxes here will further impede growth. Rather than take this money out of the financial system, and then use the political system to dole funds back to favored constituencies, how about leaving it there in the first place?

Finally, as Internet companies grow we depend on energy (how much does LinkedIn spend on power in its data centers?) and so I believe this heavy regulation on energy will come at a real cost to growth in the Internet sector.

I think this is a good conversation that Reid has started. I support much of it, but I would love to have more discussion not on what the government can do to play favorites but instead what it can do to remove impediments for people like Reid to do what he does best -- grow companies and create jobs.

Andy Kessler makes the case in the WSJ that the best path to "an open and innovative Internet is not sneaky technical fixes nor more rules and regulations and bureaucracies to enforce them. The Internet will only expand based on competitive principles, not socialist diktat." Eliminate the barriers to competitive networks, and focus on a "policy to help cut a path for more competition, rather than protecting incumbents...." Nut graph:

This is the essence of the Ed Markey's (D., Mass.) Orwellian-named Internet Freedom Preservation Act of 2008, which would foist network neutrality on the wild and woolly Internet. The Federal Communications Commission is holding a public hearing today at Harvard Law School in Cambridge, Mass., to build the case for the ill-conceived idea of preventing, as Mr. Markey's bill would, network operators from using technologies that may favor one application over another.

It's a bad idea because the only thing Mr. Markey's bill will preserve is mediocrity via the lack of competition, and full employment for regulators micromanaging a business whose very innovation comes from the lack of rules. With net neutrality, there will be no new competition and no incentives for build outs. Bandwidth speeds will stagnate, and new services will wither from bandwidth starvation.

Read it here.

Those who are critical of Bush from the economic RIGHT should keep this in mind: Virginia Postrel points out that

After nearly four years, both the WaPost--in a three-part series, no less--and the NYT, in a more-modest single article have suddenly discovered that the Bush administration has taken a dim view of regulation. Now John Kerry is (suprise) joining the chorus of condemnation, suggesting that the administration's anti-regulatory stance is nothing more or less than corruption--a quid pro quo in exchange for campaign contributions.

From Tom Hazlett: Google's message for regulators. Excerpt:

They also underscore the limits of government regulation. By offering 2 GB for the price of 100 MB, the competitive rivalry now on display highlights the implausibility of administratively determined efficiency. The e-mail market looked perfectly functional and workably competitive to antitrust analysts prior to the recent seismic shifts. Innovation by decentralised entrepreneurs has revealed a new competitive equilibrium some orders of magnitude north. And these volcanic eruptions were triggered by Google, a company not known to be in the e-mail business.

The insight produced is not that markets out-perform Soviets, or that market entry can be surprising and tumultuous - all of which is true, but not news. The remarkable aspect of this emerging war over e-mail service is that it is fought at the core of markets judged by many to be wracked by monopoly, resistant to change and immune to challenge.

is outrageous! No wonder companies are fleeing the state. Despite the deep economic problems that the wasteful spending habits or our CA legislature have gotten us into, our senators seem to think it's good use of their time to regulate and innovative service from one of California's most exciting and fastest growing companies. This will drive business out of the state and continue to damage our state economy.

I was stunned and depressed when I learned recently that for the first time, the majority of the money from California-based venture funds is being invested in companies OUTSIDE of California. California has one of the worst tax, regulatory, labor rules, and tort/legal environments in the country and it seems to be getting worse. And the legislature obviously just doesn't get it! How many businesses will have to follow HP and Intels lead by moving their teams and their expansion out of state and out of country before the politicians realize that we have a lot to lose by killing the golden gooses that drive growth and prosperity in this state.

If you don't like GMail, don't use it! Don't email to GMail addresses! But why should the CA legislature deprive us of the choice to use GMail, in the way Google built it, if we so decide? Let's be clear: this law deprives users of choice. It would prevent Google from producing a service that users could benefit from--if they choose!

I'm appalled.

Here’s an excerpt:

California senators in one house of the state's law-making body have backed Senator Figueroa's bill to limit what Google can do with the Gmail messages.

The bill aims to make Google scan messages in real time and ban it from producing records of what people are mailing each other about.

It would also bar the Californian company from collecting personal information from Gmail messages and selling it to other firms.

Senator George Allen fights the good fight as he sponsors the Internet Tax Nondiscrimination Act and advocates for it in this piece: The World Wide (Tax) Web. Excerpt:

The deployment of broadband is an essential component for small business's ability to compete, especially in rural areas. As these businesses grow, they will offer more prosperity and opportunities for young people to obtain jobs in their home communities rather than having to move away to find work. New taxation would cost millions of Americans everywhere jobs and opportunities. It would make our monthly Internet-service bill look like our telephone bills, with multitudes of state and local taxes.

The worst in patronizing politicking: "California state senator Liz Figueroa has threatened to write legislation banning Google's service unless changes are made." Folks, if you don't like GMail’s TOS then don't use it. For a politician to simply remove that choice is obviously self-serving grandstanding and the worst in political pandering. Cato was too kind to her Excerpt:

Regardless of the merits of Google's approach, legislation would be counterproductive. Without strong revenues from its targeted ads, it's unlikely that Google could afford to offer each user a gigabyte of storage space, one of GMail's main selling points. They would be forced to trim the service back, and perhaps abandon the idea altogether. Sen. Figueroa might claim the mantle of consumer protection, but consumers don't benefit from having choices taken away from them.

Google has been candid about its business model, and users should be allowed to choose for themselves whether they're comfortable with Google's terms of service. If consumers think a free gigabyte of storage space is worth the risk to their privacy, they should be free to make that choice, no matter what politicians in Sacramento or Washington think about it.

Here's the press release for the bill, by the way. One woman who thinks she knows better than Google what Google's customers want--and isn't afraid to use her political powers to impose her will. Or, more likely, just thinks this is a good way to get votes.