Confusing Risk Capital with Systemic Risk– Venture Capital Catalyzes Unlevered Economic Growth, NOT SYSTEMIC RISK

ImagesJames Freeman's Wall Street Journal Editorial of April 8th eloquently captures the critical differences between the positive risks associated with venture capital investing in new technologies and the negative systemic risks associated with the use of debt to magnify otherwise small and non-productive returns from other investing strategies. 

Policymakers need to understand that taking risk is inescapable and desirable in investing.  As long as you know what type of risk you are taking, the fact that an investment is risky does not, in and of itself, make it unwarranted.  Our country is in today's financial crisis due to the massive misrepresentation of the actual underlying risks in financial derivative products by the underwriters of those products and a massive failure of oversight by our regulatory agencies.   This has nothing to do with venture capital– our entire industry is a rounding error in the financial markets. 

In its zeal to show a renewed commitment to oversight, the Treasury Department is currently on a path which may lead to further disastrous unintended consequences from broad brush stroke regulation.  Haven't we already seen enough collective damage from regulations such as Sarbanes Oxley?  The NASDAQ is a ghost town– as of March 9, the market capitalization of 22% of all NASDAQ listed equities were below their balance sheet cash.

Freeman rightly points out:

"…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."

Of far greater concern, Freeman raises fundamental issues associated with America's economic and national security in his article, noting that unnecessary regulation will have the unintended effect of choking risk taking in technology investing:

"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."

The Obama administration and many Senators and Congressmen are betting our country's future on a renewed, sustainable economic growth cycle anchored by new business formation led by the next generation of American entrepreneurs.   Venture capital is already proven to be  the most efficient capital formation growth engine in the world, and venture capitalists are key players in the innovation ecosystem.  Let's not regulate our venture industry to death in the name of oversight. 

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