Moderator: Jonathan Axelrad, Partner, Goodwin Procter
Hale Boggs, Partner, Manatt, Phelps & Philips, LLC
Dixon Doll, General Partner, DCM. Venture industry for 25 years. Menlo Park. Beijing. Tokyo. Focus on early stage technology and cleantech. I just served for a year as chairman of National Venture Capital Association here in DC.
Paul Thanos, director Financial Services at Department of Commerce. We focus on policy advocacy and analysis. Working with banks, insurance companies. We also do some work with VC and entrpreneurship.
Bob McCooey, SVP, Nasdaq. With IPO market the way it is now, I’m glad I have time. We are seeing a more robust market.
Jonathan. What is the most important thing the federal government can do right now?
Dixon. I’ll get to that, but before that, let me refer you to a 4-point plan that I’ve distributed. We are debasing the currency by 20% – 1.4 trillion – which is the worst since 1945. I’ve met the person in China in charge of investing all their surplus. If we don’t get our deficits under control, we could precipitate another crisis if China decides not to continue to invest in us.
US Venture Capital industry is the envy of the world. China is copying our model. We’ve created 12.1 million jobs. Growth rate of venture companies is 3x others. 92% of job creation happens after IPOs, which is why we need Bob (Nasdaq) and the other exchanges. 1 of 3 Americans have been impacted in quality of life from a life sciences company.
NCVA has a 4-pillar plan to restore liquidity in the US Venture Capital industry. 1. Taxation – R&D tax credits; keep capital gains where they are. If we aren’t capital friendly to entrepreneurs, they’ll go elsewhere. We’re in a global war for talent. 2. Regulation: I agreed with previous panelist that we need the government to stay out of the way. We hope venture capital can continue to be excluded from regulatory reform. We’d like government to streamline Sarbanes-Oxley. We’re not calling for the repeal of it, but it should be less expensive for companies to go public. I agreed with the gentleman from the White House who said the government should fund DARPA, NSF, etc. I got a 4-year scholarship to get my Ph.D. One reason we have fallen behind in math and science is that that government support has somewhat gone away.
Jonathan. What is the government doing to address the types of concerns we all have?
Paul. Unemployment of 9.8%. Biggest economic problem we are facing right now. VCs and entrepreneurs are important in creating jobs. Partly as a result of that, we are creating mechanisms to make it easier for VCs and entrepreneurs to give us policy input. What would make it easier for entrepreneurs? Creation of a innovation policy council recently. Commerce Dept has commercial officers in 100 countries. Part of their job is to help US companies go global, penetrate foreign markets, become more competitive. We have worked hard to make sure VC portfolio companies are aware of this service. We want the resources of the commerce department are leveraged in the best ways possible.
Jonathan. Hale, you are a private fund specialist. There are discussions on increasing regulatory burdens on all kinds of investment funds. Reporting requirements. Are these good proposals?
Hale. A lot of Californians here–not to watch the Redskins. So AlwaysOn put a conference on here. Some are here to get a piece of the federal money. That’s all to the good. The other reason we are here is the regulatory issues. Nothing comes without a price. We’ve mentioned Sarbanes-Oxley, which followed Enron and Worldcom, etc. The folks I work with, VCs, investment bankers, CEOs — they would say these rules have deterred good people from joining their firms, have not been helpful. If there is significant and onerous investment reporting, it could stifle the private equity folks from doing what they do. If VC firms with 10-15 employees have to hire a compliance officer, it’s hard to see how that kind of regulation would achieve what it is trying to achieve. The regulation of placement agents would be a regulatory overreaction. There have been some abuses with pay-to-play schemes that involve kickbacks. But what is being proposed is disallowing the use of placement agents–that’s a sledgehammer and not a scalpel. Placement agents play a role. Smaller funds need these services to raise their money.
Bob. You can’t come here, listen to a bunch of panels, and go back to your lives and think things will happen with others. Whether you are in a VC fund or an entrepreneur, your voice has to be heard. Local representatives. SEC. Anyone crafting legislation. If they don’t hear from you, they’ll write it and pass it without enough input. And it won’t be affective. We have invited some CEOs of Nasdaq companies who came to meet with their representatives. We have people in Congress who voted for Sarbanes Oxley and still don’t know what it does.
Dixon. The people who draft the bills are well intentioned, but Sarbanes Oxley didn’t prevent the Madoff scam and other pyramid schemes. Small companies up to $75 million in revenue get an exemption. That’s ridiculous. It should be 10x higher than that. The amount of money you have to spend is amazing. IPOs went to zero — first time in 35 years. Five years ago my colleague asked Spitzer, “doesn’t it bother you that many Nasdaq companies have been orphaned” with the partition between bankers and analysts. He said, it was an unintended consequence and blew it off.
Bob. 600 of our Nasdaq companies had no research at all on them since the banking settlements — but we have teamed up with Morningstar and Nasdaq has paid for research to be done on all of them.
OpenTable and other tech companies are coming to market. In past 21 days, there have been 30 banker bake-offs for technology companies.
Dixon. I’m going to one tomorrow.
Bob. We see IPOs coming back; we have built out services for these companies. As you look at exchanges today, we have been successful because we provide investor relations, corporate governance and other services. There needs to be reform in the marketplace. Our customers have demanded more so we’ve been providing more to them.
Jonathan. This panel is not championing additional regulation. A lot of observers look at the mess we are in, and think it is the fault of lack of regulation. Is there any regulation that should be addressed?
Dixon. I don’t believe there is any from the standpoint of the venture industry. Back in 1978 I met the chairman of the venture association who cited a study that showed almost no IPOs. They came back and recommended the pension laws be modified. This was an example of how relaxing regulation played a positive role. This allowed them to invest in more risky, emerging growth companies. That basically turned the tide and got us out of the hole we were in back them. That led to a bubble that ended in 1983 when PCs and disk drive companies were hot. Led to more bubbles, and cycles. We don’t use leverage. If our entire industry went out of business, it would be a speck on the back of an elephant. We don’t take retail investors. So there is no need for protection for circumstances that don’t exist.
Bob. The problem right now is the philosophy is re-regulatory environment in Washington, where what we need is de-regulation.
Paul. We need an empowered systemic risk regulator. With AIG, it was insurance and financial services. It wasn’t clear who was regulating them. VCs are not a systemic risk problem.
Hale. Things that incentivize good behavior, co-investment funds for technologies that are deemed to be for the public good. That’s the kind of regulation that is meaningful. I have no problems with regulations or requirements attached to that kind of investment. But regulation for the sake of regulation — the idea of a systemic risk regulator may sound good, but how does it work?
Jonathan. The VC operating rules, which enabled US pension funds to start investing in venture capital, were truly a game changer. Those same pension funds and endowments, which have been the fixed funds behind VCs, are finding themselves unable to invest in these same funds, for various reasons. Some have too much in alternative asset classes, compared to their overall value, which is dropped. Is this a time when the government should take affirmative steps to re-energize the flow of capital in the venture industry? Should governments directly invest in VC funds?
Dixon. I don’t think so. I’d be shocked if institutions like Harvard and Stanford will make the same mistakes again. There should be some alternative liquidity. The history of involvement of government investment in venture capital was ugly. In China, all the municipalities wanted to pool their money and replicate the US venture model, but the managers there didn’t understand the model. Government makes a poor venture capitalist. But it can be a good support for VC if it understands its proper role.
Jonathan. Paul, we’ve all observed that regulation is being implemented by a vast patchwork of federal agencies. This creates a lot of cracks, into which some like financial industry, can fall. Should there be a single regulator?
Paul. It’s a good question and provocative. UK has a single regulator. FSA. There are many arguments that it operates more efficiently than our system. But you can also say they had similar problems to what we had here. The reality is that here in the US it is difficult or impossible to eliminate any of the regulators here. We are not going in that direction. We are going towards transparency, efficiency. It will play out over the next several months.
Dixon. The world is going global and talent is going where they have the best environment, tax treatment, etc.