San Jose Mercury News Editorial: Don’t saddle venture capital with unnecessary regulation

The following is reprinted from an editorial in today’s San Jose Mercury News (link).

The venture capital industry helped create Cisco Systems, Google and Apple. All told, for the past decade, venture-capital-backed companies have accounted annually for roughly 10 million jobs and $2 trillion in revenue in the United States.

Given the desperate need to stimulate the economy, President Barack Obama should be encouraging venture capitalists. Instead, he has tossed them into the murky pool of financial institutions that need greater regulation. The new rules will slow job creation without making the nation’s financial systems any more stable.

As part of his regulatory reforms, the president announced last week that he would require venture capital funds to register and make regular reports to the Securities and Exchange Commission. But why? We have yet to hear a good reason.

The nation’s 450 venture capital firms don’t deal with debt and don’t pose the sort of systemic risk the new regulations are designed to combat. Their investments are straightforward, and while they sometimes fail to pay off, there is no evidence the firms obfuscate the risks. There are no weirdly bundled loan packages, no traps to catch hardworking people with a few bucks to invest. If a startup doesn’t produce, it’s game over. Move on to the next venture.

And while their record of job creation is impressive, VCs are not even close to that dubious status of “too big to fail.” The venture capital industry is amazingly small, given its impact. Its total investments amount to far less than 1 percent of the financial industry. If all VC firms, from Kleiner Perkins to Sequoia Capital, collapsed tomorrow, it would pose no serious threat to the nation’s economy.

Investors need more protection from the abuses that have characterized Wall Street in recent years and trapped unsuspecting investors. But venture capitalists don’t belong under the same spotlight as hedge funds and private equity businesses.

The SEC has bigger fish to fry. It receives a reported 2,000 fraud tips a day and has only 3,600 people on staff to review them. It needs to focus on known problem areas — money managers such as Bernie Madoff, for example, whose $50 billion financial swindle by itself was almost double the size of the $30 billion venture capital industry.

Obama has drawn heavily on Bay Area talent, but it’s clear that the president and Treasury Secretary Timothy Geithner have more to learn about Silicon Valley and the role of venture capital. As it is, the valley only had one initial public stock offering in 2008, and the outlook for 2009 isn’t promising. We should be building VCs’ confidence rather than reining them in.

There’s always been a disconnect between the entrepreneurial and political capitals of the world. In Silicon Valley, Democrats and Republicans work side by side, and innovation trumps political considerations. But somebody needs to get the word to Obama on this regulation. The best thing venture capitalists can tell him in the months ahead is to leave them alone.