

Washington Is Killing Silicon Valley - prakash
http://sec.online.wsj.com/article/SB122990472028925207.html

======
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).

~~~
pg
I haven't seen this happening directly. I haven't seen founders thinking "We
can't go public, so we'd better build something small."

It could be happening via investors, though. It could be that e.g. Google
decided to go for the big time partly because there was so much funding
available in 1998, which in turn was true because investors were hoping for
IPOs.

~~~
strlen
> I haven't seen this happening directly. I haven't seen founders thinking "We
> can't go public, so we'd better build something small."

You haven't seen them say it directly, but how many applications do you get
that are for fairly ambitious and big projects? What percentage are front-end
heavy web-apps/aggregators? What percentage are fairly ambitious and require a
serious research, development and have a huge potential for growth? That's a
question you may be able to answer better than anyone else (although I'd
imagine most YC applicants are a self-selected crowd and those hoping for an
exit other than M&A and to hire a great deal of talent may not even apply to
YC).

I also didn't think about the investment angle at all. I wonder how much
investors are pushing for companies to sell quickly vs. grow.

~~~
pg
When I said I hadn't seen founders thinking that, I was also implying that I
have deep enough conversations with them that if they were thinking that, it
would have shown.

I'd say many if not most of the startups YC funds have the potential to go
public, if the founders were sufficiently driven. (In saying that I'm relying
on the fact that practically no companies that go public look like they will
at the start. Apple started out as a company that was going to sell plans for
computers.)

~~~
strlen
> In saying that I'm relying on the fact that practically no companies that go
> public look like they will at the start. Apple started out as a company that
> was going to sell plans for computers

Wow that's something I haven't entirely considered, despite knowing it to be
true. Somewhat adds to my argument, however, without the chilling effects of
regulation we may have seen a more interesting and diverse market -- but now I
am in purely speculative realm.

------
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.

~~~
Prrometheus
There are certainly companies whose cash flows were positive, but were driven
into bankruptcy because the value of their assets crashed.

We were trying to raise money for a fixed rate subprime mortgage company in
2007. They had remarkably good underwriting and very low defaults. But the
value of their assets kept on plummeting, and they were forced to meet margin
calls by their creditors. That firm no longer exists.

However, the cash coming in from their assets could have paid their debt and
operating expenses indefinitely. If there was no mark-to-market, then I would
know a hundred or so extra people in New York with jobs.

~~~
timr
One could make a reasonable argument that if their balance sheet was so tied
up in sketchy mortgage assets that they were forced to meet margin calls when
the market fell, then they _weren't_ as solid as they seemed. Their problems
started before they got in the car.

I realize that there's a bit of begging-the-question here, but even so, if
you've borrowed a ton of money and secured it with "assets" of questionable
value, then you're taking a risky bet. The accounting regulations didn't make
the bet better or worse -- they just kicked the losers out of the game before
they wanted to quit.

~~~
mmmurf
The purpose of mark-to-market exceptions are to allow temporary price
volatility not to drastically impact a firm's balance sheet. The FASB rule
specifies that it's an acceptable practice to suspend mark-to-market in "fire
sale" conditions.

But the real issue is the flawed risk ratings on the MBSs. If your asset is
AAA then it really shouldn't matter whether you are marking it to market or
not, as it's supposed to be quite liquid, by definition, as there is supposed
to be extremely little risk that its price will fall.

The reason the MBSs weren't liquid is because the ratings were incorrect and
the market knew that -- perverse incentives from ratings agencies had led to
this, as had the widespread belief (taken as an assumption by many foolish
risk-managers and codified into pricing formulae) that housing prices could
not fall.

If the MBSs had been properly rated, then mark-to-market would not have caused
the firms holding them on their books to become insolvent, as capital adequacy
requirements are based on the riskiness of the assets.

So while mark-to-market may have sped up the failure of those firms, the firms
were already weakened due to their treatment (thanks to bad ratings) of risky
debt as AAA.

In fact, a few months before things got really bad the SEC sent out a memo
advising that the fire-sale provisions of the FASB rule regarding mark-to-
market were not to be used, a decision which suggests either that the SEC was
OK with some firms failing in the near future (unlikely) or that it believed
that the ratings were generally accurate (even more unlikely). I've been told
by some Wall Street experts that everybody knew that the ratings were BS.
Hence the SEC's decision to send the memo was probably just intended not to
telegraph the possibility of a future problem to avoid spooking the market in
hopes that the problem would go away.

A few things to note: The regulatory trend is moving toward BASEL II which
relies heavily on both mark-to-market accounting and third party ratings
agency ratings. So the big regulatory question is, how can the perverse
incentives that arose and led to the inaccurate ratings of MBSs be restrained?
So far everyone is talking about banning the trading of x, y, and z and of
limiting bonus pay, executive salaries, etc., but nobody is talking about the
actual concrete perverse incentives (pressure on ratings firms to issue
inaccurate ratings) that fed the whole mess.

~~~
Retric
I think a requirement for a random subset to be inspected by a real
independent group like the SEC would cut down on a lot of this crap. You would
see a lot of stuff get through but it would put a dampener effect on bubbles.
You would also need to keep track of how the agency rated vs each company.

------
wavesplash
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.com/6f879h>

~~~
ryanwaggoner
_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 costs, closing one of the
two viable exits for founders and investors.

2\. "Raising the bar" for IPOs makes it sound like we're just going to get
higher quality. The reality is that most companies can't afford to IPO, and
even if they can, they're now hampered by greater costs and the distractions
of compliance. If the bar needs to be raised, let the market raise it.

3\. IPOs are _not_ about consistent revenue generation: they're about raising
capital. There's absolutely no reason why a growth business like Facebook that
is not profitable shouldn't be able to IPO. If the market likes their odds of
succeeding in the long run, their IPO will be a success. If not, it won't. In
your model, someone apparently gets to _decide_ who "deserves" to IPO. This
kind of thing has never worked and almost always has the opposite effect of
that desired.

~~~
davidw
I'm willing to buy the argument that SOX is bad for startups. It's easy to
knock things, though, and harder to suggest something better. His only
suggestion is to lower capital gains taxes. I think there's also an argument
that if you can't trust companies' books at all, that creates problems as
well.

Wikipedia has some useful information, as useful, see the 'Criticism' and
'Praise' sections:

<http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act#Criticism>

My guess is that it's one of those technical things where reworking it to keep
what's good about it (making the CEO and CFO sign off on stuff sounds
sensible), and dumping some of the bad bits is the best course of action.

I also have a suspicion that perhaps lack of regulations wasn't the biggest
problem, but lack of regulatory enforcement with some teeth to it.

~~~
fallentimes
It was conceived at the worst possible time (after Enron, Worldcom, etc); it
was bound to be a failure. There's a reason why it's not wise to go shopping
hungry. I agree, though, the answer is probably somewhere in the middle.

------
snow
Sarbanes Oxley does hurt the IPO market, but for good reasons. It serves to
protect public investors from unscrupulous accounting. Expensing stock options
has been part of the International accounting standards for a while now and
makes sense. Otherwise, you've hidden a lot of your costs from your financial
statements. Also, forcing companies to acknowledge their special purpose
entities prevents companies from hiding their debts. The article's point about
"made sure that corporate directors would never again have financial privacy"
is wrong. Financial transparency is always desired. Investment banks have to
worry about the cost of exposing their strategy when buying & selling, why
should managers be different considering they have a lot of insider
information in their heads.

SOX is bad for statups, but not for those reasons. The cost of compliance for
smaller companies is too great in comparison to their income. The entire SOX
shouldn't be brought down, it should be made more friendly for smaller
corporations and an effort is already being made (see wikipedia under heading
SOX 404 and smaller public companies)

------
beastman82
This article is heavily biased, makes ridiculously exaggerated claims, and
bends statistics to its will.

The computer boom came about because of capital gains tax cuts, huh? What a
joke.

~~~
ksvs
I suspect capital gains cuts did help. Founders are influenced by colleagues
who've done startups, and what they see is the after-tax returns. And
certainly big investors are influenced by tax rates on each class of
investment.

~~~
fallentimes
This is anecdotal, but I've never heard someone say they would or wouldn't
start a company because of the after-tax returns.

Cuban talks about this point here:

[http://blogmaverick.com/2008/10/23/the-cure-to-our-
economic-...](http://blogmaverick.com/2008/10/23/the-cure-to-our-economic-
problems/)

~~~
ksvs
Of course not. After-tax returns influence them indirectly. Fellow grad
student goes to work for a startup, ends up with a house vs merely a nice car.

~~~
fallentimes
Oh I guess I was thinking of the founders, not the employees.

------
tokenadult
I always like international comparisons as a reality check on discussion of
policy in the United States. Are countries without regulations like Sarbanes-
Oxley enjoying a boom in entrepreneurial start-ups? Where?

~~~
ksvs
China

~~~
tokenadult
Are you planning to invest in a lot of Chinese start-ups?

~~~
mmmurf
Don't underestimate the entrepreneurial spirit that is going on in China.

It's just political propaganda that China is oppressive and thwarts
entrepreneurship. Sure there are some problems, but China's human rights
issues are about on par with Gitmo.

------
happylancer
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 liquidation route for startups
now since the M&A market is quiet now.

~~~
Darmani
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 difference
between life and death.

It was actually a comment similar to this one a few weeks ago on HN that made
me recognize this as a bias. I wonder if there's any literature on it.

~~~
nostrademons
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.

~~~
ryanwaggoner
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>

------
indiejade
It's actually the _deregulation_ of Washington that's suffocated
entrepreneurship. Because there were/are no checks and balances on the large
monoliths' ability to kill or absorb rivals, a lot of little entities have
suffered. Washington always says it wants to do what is best for "business,"
but it rarely distinguishes big business from small. . . it doesn't get the
correlation between size and efficiency. The hum-hawing about corporate tax
rate is pure whine. Let the little companies live long enough to make a profit
upon which they have the ability to pay taxes, eh?

~~~
indiejade
Please don't downmod me without telling me why you've done so. Do you disagree
with my points? Which ones? Are you pro-deregulation? If so, please provide
some example about why you think big companies getting bigger by absorbing
their competitors is _good_ for entrepreneurship.

Perhaps you have something against me personally? For that, I have no remedy,
but to tweet for help: <http://twitter.com/indiejade/status/1072506322>

~~~
ksvs
"Resist complaining about being downmodded. It never does any good, and it
makes boring reading."

<http://ycombinator.com/newsguidelines.html>

------
gruseom
Since SOX has all this overhead, I wonder if there's an opportunity for a
startup focused on reducing it.

~~~
fallentimes
You'd have to go through the government, which is even more
overhead/TPS/bureacracy/politicking than SOX.

~~~
gruseom
That was my thought too, but then so many good ideas look dumb at first
glance. It's possible that someone could make something of this. One trouble
is that there can't be very many smart hackers with a passion for regulatory
compliance.

------
tokenadult
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 about this) that the whole point of
starting a start-up is to have FLEXIBILITY to decide later how to cash out the
business. Some like to sell to one company, some like to sell shares to the
public at large, and some stay closely held for a long time. To each their
own, methinks.

~~~
ohhmaagawd
I know a CEO of an Internet company that planned on doing an IPO in 2008. Of
course the economy tanked so it's not happening.

He told me that SOX required the company to have auditing/traceability and
controls for everything. This meant they quit using any software as a service
applications, they shut down IM, they have to keep track of everything on
every machine, banned a whole list of applications that would interfere with
SOX (iTunes, file sharing, and music app), etc.

They had to hire lawyers, more accountants, consulting firms. He told me they
were looking at > 10m to comply. And that doesn't count lost productivity of
having to act like a draconian big ass company where they had to have design
docs for everything they do, detailed project plans, get rid of the tools they
use (as listed above), etc.

In other words to go IPO now you give up agility, spend more money, and become
less productive.

~~~
Retric
IPO's are for large profitable companies who want to add liquidity. There is a
huge pool of companies and people that invest billions in companies without an
IPO, but there is a lot of laws setup to protect small investors. Anyway,
there is a lot of overhead to going public, but if you want liquidity without
selling then you need transparency or some company's are going to do huge
scams.

PS: There are IM clients that large companies can use so clearly some of what
he said was BS.

~~~
fallentimes
Well it used to be for raising large amounts of capital (even for unprofitable
companies). This is apparently no longer the case.

------
known
I think companies that are willing to comply with

[http://en.wikipedia.org/wiki/Freedom_of_information_in_the_U...](http://en.wikipedia.org/wiki/Freedom_of_information_in_the_United_States)

should be exempted from SOX so that they can raise funds through IPO.

------
quoderat
Pabulum for people who have Rand or Heinlein poisoning.

Saying that Bear Stearns and AIG were cash positive is absolutely meaningless,
as if I just bought $5 million worth of stuff on my credit card, make $40,000
a year and haven't gotten a bill yet, I'm still cash positive.

It's a little different, and much more complex, but I don't think the article
writer really cares to understand any of that -- he just wants to beat the
dereg drum, no matter how much sense it makes or doesn't.

------
mooism2
In a single paragraph, this article claims that options in start-ups aren't
worth anything, and then claims that without start-ups being able to hand out
options they can't attract the people they need. Are options highly valuable
or worthless? It can't have it both ways.

~~~
Darmani
Options are worthless because companies can't go public in most cases and
therefore options can't be sold. To attract top employees, startups need the
ability to give options which can be sold and therefore aren't worthless.

------
mtw
does anyone know if it's possible to do an IPO in Canada (instead of the
london stock exchange, as the article suggests)?

------
sabat
I rarely if ever agree with the WSJ, but here's an example of where I think
they've mostly got everything right. Ayn Rand was naive but did have a point:
innovation happens when you leave the innovators the hell alone and let them
invent. Washington is indeed fooling with that formula.

------
unrealwh
totally the opposite! i can't think of one region that has benefited more from
the Fed's policy of moving us to a bubble-based economy. the economic model of
silicon valley in the last two decades has been predicated on transferring
massive amounts of wealth from speculators to equity holders. normally this is
a get-rich-slowly model. the Fed turned it into a get-rich-in-two-years model.

------
Raphael
Yeah! That's my evergreen state. Watch out, Houston; you're next.

~~~
helveticaman
This is argues the federal government, not Washington State, is killing
Silicon Valley and all tech centers like it.

~~~
Raphael
I know. It was a joke. Plus, it irks me that people omit the "D.C.", because
it always confuses me for a few seconds.

