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Washington Is Killing Silicon Valley

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Re: Washington Is Killing Silicon Valley

#61

Post by nostrademons »

Darmani wrote: post #37
happylancer wrote: post #19

i think most entrepreneurs in SV do not think of regulations when starting a company. for example, there aren't any tax laws to my knowledge that makes me go, "ah gotta take care of that before i can code." of course, there will be an impact if a company wants to IPO, but that comes much later on. However, even in that case, it's more about revenue/income generation. i'm interested in seeing what's going to be the li…

Small burdens are never directly visible. No entrepreneur thinks "If taxes were 5% lower, I'd start a startup." Instead, they think "If I had twice as much savings, I'd start a startup" without stopping to realize they're saving an amount equivalent to 5% of their taxes. In a similar vein, if my video game character gets -10% to speed (or +10%), I typically shrug it off as nothing, but it all too often is the differe…

In my philosophy class, there was something called the Heap Problem:

"One grain of sand is not a heap. Adding a grain of sand to something that is not a heap will not make it a heap. By induction, then, heaps cannot exist."

The conclusion, of course, is obviously false, because heaps of sand do exist. But you can't state at what point something that's not-a-heap becomes a heap.

AFAIK, this was still an open question when we covered it in class (2001). I don't know of anyone that's provided a convincing argument for why two premises that seem true result in a conclusion that's obviously false.

Re: Washington Is Killing Silicon Valley

#62

Post by nostrademons »

fallentimes wrote: post #59
nostrademons wrote: post #57

Earlier quoted context omitted.

Concentration of wealth and less efficient capital markets. There's really nothing wrong with it from most entrepreneurs' POV: they build something people want, they get paid for it. The problems occur at the margins: the businesses that could be started with enough outside capital but can't be bootstrapped off initial cash flows, or the small investors that are perfectly capable of doing due diligence on companies b…

But wouldn't other outside capital forces emerge (e.g. private equity, VC, etc?).

Like Goldman Sach's private stock exchange? Sure, but as they grow they run into the same problem as public capital markets. Eventually somebody prominent gets screwed, they make a big stink about it, and the government regulates them as if they were public.

This is basically the story behind investment trusts, mutual funds, and hedge funds. Back in the 20s, everybody put their money into investment trusts. They got screwed by the Great Crash, so the government put all these restrictions on public investment vehicles (can only invest in stocks & bonds, can have no more than 1.5% of assets in any one security, etc.) and the trusts were reborn as regulated mutual funds.

Then people realized that because mutual funds were so regulated, they were leaving money on the table, and all these alternative asset classes like commodities, timber, derivatives, venture capital, etc. were ripe for the taking. So they created a new class of investment vehicle, hedge funds, without the regulations but only open to people who supposedly know what they're doing.

Now ordinary people are investing in hedge funds indirectly, through funds-of-funds and pensions, and they're getting screwed. So there're calls to regulate hedge funds now.

Financial markets treat regulation as damage and route around it. Unfortunately, they sink many suckers in the process and create demand for new regulation, and so on.

Re: Washington Is Killing Silicon Valley

#63

Post by medearis »

russell wrote: post #40
tokenadult wrote: post #2

Voted up because the premise of the article is interesting. But I disagree with the statement that Sarbanes-Oxley is killing entrepreneurship, so I'd like to hear comments about that from the entrepreneurs here. I'm also not sure that it is a sign of failure that many start-ups sell themselves to an existing big company rather than doing an IPO. It seems to me (again I would like to hear from the entrepreneurs here a…

I worked for a company a couple of years ago that was planning to public in a year or two. The CEO told us that complying with SOX would cost $3 million for the IPO and over $1 million per year after that. That's a huge burden for a company with revenues of $35 million at the time. I have read that it is now $5 million for an IPO and that no company with revenues under $100 million can afford to be public. Malone say…

Malone isn't crediting Regan for the internet boom of the 90's. He is saying that cutting capital gains taxes helped spur the electronics boom in the 80's. Since we have had relatively low capital gains taxes for the last 30 years, and most of us agree that low capital gains taxes are a good thing for innovation, why would we consider raising them now?

I do think its interesting that, even when Obama was talking about the potential for large cap. gains tax increases, he made a point to exempt "small businesses and startups." I'm not sure how we could draw that line, but it indicates to me that Obama has exactly Malone's general argument in mind.

Re: Washington Is Killing Silicon Valley

#64

Post by fallentimes »

nostrademons wrote: post #62
fallentimes wrote: post #59

Earlier quoted context omitted.

But wouldn't other outside capital forces emerge (e.g. private equity, VC, etc?).

Like Goldman Sach's private stock exchange? Sure, but as they grow they run into the same problem as public capital markets. Eventually somebody prominent gets screwed, they make a big stink about it, and the government regulates them as if they were public. This is basically the story behind investment trusts, mutual funds, and hedge funds. Back in the 20s, everybody put their money into investment trusts. They got…

But the thing is, if it's so cat & mouse does it really matter if they are fewer public companies? That was my point.

It's hilarious because hedge funds are a scam (based on traditional 2 & 20 fees alone). Then someone creates fund of funds, which is a scam of a scam. And people are dumb enough to buy it.

Re: Washington Is Killing Silicon Valley

#65

Post by strlen »

What Sox has done is effectively limit entrepreneurs to non-ambitious projects. That's why you see bright ex-Google guys leaving to do projects which are essentially either copy-cats or mash-ups (hardly any true technology involved, except in few very promising cases).

With M&A as the only exit available, the pay out for any employee other than perhaps the first-five isn't going to be a "home run". Thus there would be nothing for them to justify giving up a higher salary, stability and working longer hours: their options won't be worth much.

Trying to grow the company to post-SOX IPO size would also mean a much greater gamble and much greater time investment. Now the options wouldn't account for anything for possibly as long as ten years (which isn't much shorter than climbing the ladder at a big company).

This means that smart hacker's most economically rational choice is either working for a big company (which issues RSUs or options for publicly tradeable stock) or co-founding or being employee# 1-5 in a less ambitious venture (which usually isn't going to provide very much of a technical challenge).

Not all is bleak, however: it's unlikely that SOX will go (but perhaps I am a pessimist when it comes to govt. getting smaller) but we could see mid-size private companies providing revenue sharing/bonuses (in lieu of options), smarter M&A strategies (e.g. acquirers letting the companies they bought maintain their culture and grow, while offering employees additional upside or even spinning the ventures off for an IPO - but with big co's resources, most notable example of this is EMC + VMWARE acquisition and IPO) and finally markets where smaller players could still have interesting technologies to play with (vs. general database driven websites, which don't really involve much "hard core" tech).

Re: Washington Is Killing Silicon Valley

#66

Post by wavesplash »

ryanwaggoner wrote: post #15
wavesplash wrote: post #3

Pure subterfuge. A thinly veiled attempt to justify tax cuts and deregulation. AIG was killed by accounting? Try again. SOX hasn't killed the IPO, it's just made the hurdle higher and that's ok. IPOs are about consistent revenue generation - most of the firms of Web 1.0 didn't have it and didn't deserve to IPO. The WSJ has truly been compromised by Murdoch. NYTimes editorial on the death of the WSJ: http://tinyurl.co…

SOX hasn't killed the IPO, it's just made the hurdle higher and that's ok. IPOs are about consistent revenue generation - most of the firms of Web 1.0 didn't have it and didn't deserve to IPO. Wrong, wrong, and wrong. 1. SOX has killed the IPO; IPOs have plummeted since SOX, due to the ridiculously draconian laws that make compliance expensive and time-consuming. Startups and small companies just can't afford the cos…

1) I dug up the following table - it doesn't appear that SOX killed the IPO. There were over 150 IPOs each year from 2004-2007:

http://bear.cba.ufl.edu/ritter/IPOs2008VC.pdf

(The question is what the heck is going on in 2008?)

2) Yes, we are getting better quality. If you were around for the fluff IPOs of the late 90s you'd agree. For every Kana Communications there were at least 9 other immature flops like pets.com, etoys.com, flooz.com that died within 3 years.

3) Companies get to choose their own destiny. If they're ready to IPO they'll swallow the $5million overhead of SOX and head out to the market. Those that can't swallow the cost or time will either have to wait or find alternate means.

That said, SOX is still a beast born of a knee-jerk reaction and I'd love to see it streamlined. But there's some good in there.

Re: Washington Is Killing Silicon Valley

#67

Post by [deleted] »

Darmani wrote: post #37
happylancer wrote: post #19

i think most entrepreneurs in SV do not think of regulations when starting a company. for example, there aren't any tax laws to my knowledge that makes me go, "ah gotta take care of that before i can code." of course, there will be an impact if a company wants to IPO, but that comes much later on. However, even in that case, it's more about revenue/income generation. i'm interested in seeing what's going to be the li…

Small burdens are never directly visible. No entrepreneur thinks "If taxes were 5% lower, I'd start a startup." Instead, they think "If I had twice as much savings, I'd start a startup" without stopping to realize they're saving an amount equivalent to 5% of their taxes. In a similar vein, if my video game character gets -10% to speed (or +10%), I typically shrug it off as nothing, but it all too often is the differe…

[deleted]

Re: Washington Is Killing Silicon Valley

#68

Post by ryanwaggoner »

nostrademons wrote: post #61
Darmani wrote: post #37

Earlier quoted context omitted.

Small burdens are never directly visible. No entrepreneur thinks "If taxes were 5% lower, I'd start a startup." Instead, they think "If I had twice as much savings, I'd start a startup" without stopping to realize they're saving an amount equivalent to 5% of their taxes. In a similar vein, if my video game character gets -10% to speed (or +10%), I typically shrug it off as nothing, but it all too often is the differe…

In my philosophy class, there was something called the Heap Problem: "One grain of sand is not a heap. Adding a grain of sand to something that is not a heap will not make it a heap. By induction, then, heaps cannot exist." The conclusion, of course, is obviously false, because heaps of sand do exist. But you can't state at what point something that's not-a-heap becomes a heap. AFAIK, this was still an open question…

Reminds me of Zeno's paradox about Achilles and the tortoise:

Achilles is in a footrace with the tortoise. Achilles allows the tortoise a head start of 100 feet. If we suppose that each racer starts running at some constant speed (one very fast and one very slow), then after some finite time, Achilles will have run 100 feet, bringing him to the tortoise's starting point. During this time, the tortoise has run a much shorter distance, for example 10 feet. It will then take Achilles some further time to run that distance, in which time the tortoise will have advanced farther; and then more time still to reach this third point, while the tortoise moves ahead. Thus, whenever Achilles reaches somewhere the tortoise has been, he still has farther to go. Therefore, because there are an infinite number of points Achilles must reach where the tortoise has already been--he can never overtake the tortoise.

http://en.wikipedia.org/wiki/Zeno%27s_paradoxes

Re: Washington Is Killing Silicon Valley

#69

Post by tokenadult »

pg wrote: post #27
wavesplash wrote: post #3

Pure subterfuge. A thinly veiled attempt to justify tax cuts and deregulation. AIG was killed by accounting? Try again. SOX hasn't killed the IPO, it's just made the hurdle higher and that's ok. IPOs are about consistent revenue generation - most of the firms of Web 1.0 didn't have it and didn't deserve to IPO. The WSJ has truly been compromised by Murdoch. NYTimes editorial on the death of the WSJ: http://tinyurl.co…

SOX hasn't killed the IPO, it's just made the hurdle higher and that's ok. Actually it has. It introduced a qualitative change in liability for corporate executives. Selling now has way, way less downside. The reason that's not "ok" is that a higher hurdle doesn't merely cause companies to wait before IPOing. They get bought instead. Result: no new public companies.

"Result: no new public companies."

Thanks for answering my implicit question about why an investing member of the general public should care about whether start-ups get bought out by existing companies or go public themselves. It makes sense that over the long haul, a more diverse ecosystem of publicly traded companies makes for a more resilient economy and more opportunities for small investors to make profitable investments.

Of course, the current tanking of the stock market all around the world, by no means only in the United States, might suggest that small investors need to know that the ecosystem does have selection pressure for transparency and accuracy of corporation statements to investors. I appreciate the replies by various participants here on how Sarbanes-Oxley has a different cost burden for new, smallish start-ups as contrasted with established, large public companies. Perhaps adjustment of some rules to take into account the size of a firm is in order.

Re: Washington Is Killing Silicon Valley

#70

Post by timr »

The editorial went off the tracks right here:

"FASB's "mark-to-market" accounting rules helped drive AIG and Bear Stearns into bankruptcy, even though they were cash-positive."

Claiming that mark-to-market accounting killed Bear and AIG is a bit like claiming that seat-belt laws kill people who drive drunk.

AIG and Bear were engaged in a fatal game, regardless of the accounting rules. Mark-to-market accounting may have accelerated the crash (by forcing them to account for bad investments today, instead of hiding them on the balance sheet for some indefinite time), but the fundamentals of their crappy investments didn't change as a result of the rule.

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