Wednesday, December 24, 2008

Killing the Golden Goose

Michael (S.) Malone is a Silicon Valley pundit with a multi-faceted success trajectory. He wrote the definitive books analyzing the strategies and culture of two local icons, Apple and HP. (The former was a major source for the history portion of my dissertation).

Malone is a former HP employee who’s been covering the tech industry for nearly 30 years, having worked for the Mercury News, Upside (boy I miss that mag), Forbes ASAP, ABC and even the gray lady herself. He's even a successful Boy Scout leader: talk about all-American.

This week he took aim how the policies that once made such innovative startups possible have been eroded throughout this decade (i.e., under Bush 43 and under both Republican and Democrat legislative control).

As evidence, he cites the recent dearth of IPOs:

Washington Is Killing Silicon Valley
Entrepreneurship was taken for granted. Now we're seeing a lot less of it.
From the beginning of this decade, the process of new company creation has been under assault by legislators and regulators. They treat it as if it is a natural phenomenon that can be manipulated and exploited, rather than the fragile creation of several generations of hard work, risk-taking and inventiveness. In the name of "fairness," preventing future Enrons, and increased oversight, Congress, the SEC and the Financial Accounting Standards Board (FASB) have piled burdens onto the economy that put entrepreneurship at risk.

The new laws and regulations have neither prevented frauds nor instituted fairness. But they have managed to kill the creation of new public companies in the U.S., cripple the venture capital business, and damage entrepreneurship. According to the National Venture Capital Association, in all of 2008 there have been just six companies that have gone public. Compare that with 269 IPOs in 1999, 272 in 1996, and 365 in 1986.

Faced with crushing reporting costs if they go public, new companies are instead selling themselves to big, existing corporations. For the last four years it has seemed that every new business plan in Silicon Valley has ended with the statement "And then we sell to Google." The venture capital industry is now underwater, paying out less than it is taking in. Small potential shareholders are denied access to future gains. Power is being ever more centralized in big, established companies.
He then lists the usual suspects of regulation: Sarbanes Oxley, FASB, the SEC, as well as the capital gains tax increase promised by candidate Barrack Obama.

In happier times, his arguments might carry some weight. But after the various GSE and bank frauds that brought the stock market down 40% this year — not to mention Bernie Madoff — efforts to reduce regulation of private companies will fall on deaf ears for several years.

It’s clear that things will get much worse for entrepreneurs before they get better, not only with regulation, but with heavy-handed government intervention that crowds out private investment. There’s no guarantee things will get better any time soon: some impediments to free markets may last for decades. Some even could become permanent, if those who admire Europe’s nanny state succeed in importing it to the US, complete with Eurosclerosis. (Where’s Lady Thatcher when you need her?)

I suspect Malone knows all this: the article in Monday’s Journal is his stake in the ground to say “I told you so.” And perhaps when the President comes back to the Bay Area in 3 years to raise money for his re-election, some of his ardent VC supporters will remind him of these burdens on entrepreneurs and the damage that they do.

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