VC Regulation

Just read in the WSJ (no point in linking since I’m sure it will be behind a paywall in a short period of time) that the VC industry’s likely getting regulated. Comments from the Obama administration indicated that any private pool of capital-under-management in excess of $30M will have to register with the SEC and be subject to regulations and inspections accordingly.

I can see the need for increased regulation of private capital, but I disagree that the threshold for regulation should be an arbitrary capital-under-management number. The common theme amongst all the financial train wrecks we’ve encountered over the past year have been due to debt leverage, not capital under management. Lehman Brothers was leveraged 40-1 according to their final balance sheet, the average American took out (or was duped into) mortgages larger than he/she could afford, even the US Government debt is so high that each citizen’s share is a shocking $37,247.58, which isn’t helped by the fact that in 2007 the average American annual rate of saving dipped negative.

So, instead of regulating private pools of capital in excess of $30M, we should be regulating private pools of capital that are leveraged up past 3-1 (or some other low, arbitrary threshold). I don’t know how leveraged the venture capital industry is on the whole, but a rough guess would be about 1.1-1 or even 1.05-1. Venture debt is a very tiny portion of an early stage startup’s financing plans; typically 95% of capital (if not more) in an early stage startup is raised via equity sale.

Barack, I know you follow my tumblr :) So take a kind word of advice and focus on debt leverage, not capital under management.

I couldn’t agree more - arbitrary numbers here make no sense. The risk profile changes significantly when debt is added to the fund structure - not when more equity is infused. Kind of silly…

thegongshow