By Tim Draper, Founder and Managing Director of Draper Fisher Jurvetson, global venture capital
How tough is this for politicians to understand? If you take liquidity out of the market, less capital finds its way to businesses. Less money is spent in research and development and more is spent on succumbing to regulations. Products become stale. Businesses falter. America becomes less competitive. People lose jobs. Duh!
Are we surprised that Sarbanes-Oxley has led us to recession? Sure Sarbox came at a time when the investors were losing confidence in companies like Enron, but at what cost. Let’s do the math. There are roughly 5000 Nasdaq companies, and 3000 NYSE companies. Sarbox on average has cost them each more than $4 million a year. That is more than $32 Billion every year. That is more than one million jobs at $32,000 per year. In market value, at a typical P/E ratio, that is nearly one trillion dollars. But it is even worse than that in long term effect, because if companies can’t invest, they lose product lines, they don’t take chances, and they don’t help us grow our economy. I estimate that the Enron and Worldcom disasters combined cost us all less than 2 percent of that. So the cure is more than 50 times as bad as the disease.
From a venture capitalist’s point of view, Sarbox is incentive destruction. Before Sarbox, our portfolio companies, after 5 to 7 years could go public if they had about $20 million in revenues, and about $3 million in profits. But with Sarbox compliance running at about $3 million a year for small businesses, those companies would be breakeven at best, and have no interest to Wall Street. So now, an entrepreneur who dedicated 5 to 7 years of his/her life will have to risk 4 or 5 more years to hope to get the company to a place where Sarbox compliance doesn’t take such a toll on his business before getting public. This is too much to ask of Americas great risk-takers. America’s entrepreneurs make enormous sacrifices for the good of the country, the consumer, and their shareholders already. Adding 4 or 5 years to their battle will make their species more endangered than the white tiger. They ask, “would I sacrifice 5-7 years for the good of society?” Maybe. “9-12 years?” No way.
A compounding effect is what it does to the venture capitalist. A VC is typically in a 10 year partnership with his/her own investors. He/she is certainly willing to wait 5-7 years for an entrepreneur to build his/her company. But what happens when that investment horizon becomes 9-12 years? The VC stops investing, or stops investing in American entrepreneurs in favor of entrepreneurs who are not burdened by Sarbox. American entrepreneurship declines, and the great global entrepreneurs and the money go elsewhere.
But, as they say on the shopping channels, “that’s not all.” It turns out that the financial pride of America, our stock exchanges are now not competitive. All these regulations have stymied the growth of one of the cornerstones of the American economy. In fact, there was NOT ONE single venture backed IPO that went public on Nasdaq this quarter. This is unprecedented. Not in the history of Nasdaq has there been a quarter of a year passed with no IPOs. Are we surprised? We are in a competitive world. Who wants to go public on highly regulated Nasdaq when they can have liquid markets without Sarbox on AIM, Singapore, Hong Kong, Shanghai, Dubai, and many, many other competitive stock markets in the world.
But it is not only start-ups that get hurt here. Larger companies, in order to comply spend even more each year on lawyers, accountants and “Sarbox consultants” instead of spending on research and development to remain competitive in the future.
A message to lawmakers and bureaucrats: Please do not take recognition of this problem to mean we need something you might call “liquidity regulation.” Please stop yourself. We cannot take any more knee-jerk legal solutions to business problems. We are the camel, and regulations are on their last straw.
The sooner this law is off the books, the sooner we can all go back to believing that America is the land of opportunity. If you want the USA to win again, free up the markets.
Enough of this watchdog economy. Go back to “caveat emptor” or “buyer beware” and let the markets run free. Repeal Sarbanes-Oxley. Do it now. No one will notice. Everyone will benefit.
Tim Draper is a global venture capitalist with Draper Fisher Jurvetson
very speculative article
we need more transparency, author on the contrary is arguing FOR LESS of it
This kind of attitude will result in less trust given to any kind of securities including but not limited to stock markets
Any time i sense that i am NOT SURE WHAT IS BREWING INSIDE- i realize that risk goes exponentially UP
And here: it does smell FISHY.
The problem with credit crisis today came EXACTLY from the idea to increase liquidity and it did increase in the last 2 decades enormously.
Today total volume of securities in the USA is 3 time larger then 1 year of GNP.
In 1980 it was only 1 GNP, if i am not mistaken.
Liquidity is a vehicle to start growth,
but uncontrollable growth of liquidity gives to FISHY people lots of opportunities to misuse it, to steal, to cook the books, u name it.
Kabud, Mr. Draper is arguing for neither more nor less transparence; rather he’s calling for all the transparency you are willing to pay for. Oh, and he’s calling on you to use your own eyes and brains instead of relying on the State to supply an ersatz version of them.
Really, Kabud, do you have more trust in stock-issuing U.S. companies because of the Sarbanes-Oxley law? When I sense that I am not sure what is brewing inside a company’s books, I don’t worry about somebody else’s assurances that the risk is low. Instead, I stay away from that company.
The phrase “uncontrollable growth of liquidity” is just too silly for words. If there really were such a thing, then there’d never be a fall in any market blessed with such a state of affairs.
How about dividing the markets into two parts, one full of arbitrary rules and regulations enacted by politicians with Good Intentions (trademark of the Highway to Hell Paving Company) and another part for adults?
The main problem with this arguement is that there is not enough natural resources to allow the model to succeed. In a theoretical world with unlimited natural resources, yes it theoretically works, but in the real we only have one earth with finite resources.
Government regulation is required to ensure that we have a planet to live on. No planet = no economy.
The biggest threat to the US’s medium term economic outlook is lack of action on the environment in which the economy operates.
kabud,
I might agree with you if Sarbox improved internal controls and increased the reliability of financial statements, but this is not the case. From my perspective Sarbox created a nightmare for an already overly stressed accounting department. I see lots of money being spent on “Sox implementation” but for no real value. It’s simply lip service for evidence that proper accounting principles are being observed. It doesn’t change anything. What is needed is more accountability from auditing firms and top management, not more paperwork for accounting departments. I agree with Tim’s comments. I can’t see how small business can possibly stay competitive with these kinds of useless costly regulations.
Mr. Draper is absolutely right–and if you have ever considered joining a corporate Board and considered the new risks to your assets and your family’s future, you’d know why Sarbox is dumbing down our companies–only an idiot would become a director of a public company under these conditions!
Right on Tim.
Sarbox is a nightmare. But when does government ever opt for less power and control over forces it doesn’t understand?
Tim Draper for governor!
Mr. Tender, what does your comment have to do with the article.
Sarbox was an overreaction to something that was caught by the current laws at the time. It has caused more problems than it resolved and only entrenched larger, less competitive companies because they can absorb the costs of compliance more easily.
Michaelyi: very good ideas.
Well, my point now is a little different:
lets have even more transparency and find better ways
one really has to be hands-on familiar with application of Sarbanes-Oxley
which i am NOT.
We don’t need bad regulation, we need better regulations.
I am not familiar with exact way the OXLEY regulation works, but i will consult with a specialist later today
It could be tha author is in fact proposing a way out of the current losses by possibly creating another bubble.
Financiers will be making more money, public will get less information on the companies real situation.
By the way, here is a very good source that will give you an understanding of world liquidity growth. You have to give them email though when register:
http://www.mckinseyquarterly.com/article_page.aspx?ar=2100&pagenum=1
The continued growth of global financial assets
The full fallout from the credit market volatility of 2007 remains to be seen. But over the longer term, the volume of global financial assets (the value of all bank deposits, government debt securities, corporate debt securities, and equity securities) will continue to expand. Over the past 25 years, through stable and stormy times alike, financial assets have grown robustly. In 2006, their value rose to $167 trillion, from $142 trillion the year before—a 17 percent increase, more than double the average annual growth rate (8 percent) from 1995 through 2005.2
For many years, as equity and bond markets thrived, bank deposits have accounted for a shrinking share of total financial assets. That trend continued in 2006, but the rate of decline slowed because the absolute value of bank deposits around the world jumped by $5.6 trillion—twice the average increase of the previous three years.3 The largest contributor to this rise was the United States, thanks largely to strong income growth and the housing boom, which enabled many households to tap their home equity for quick cash. This source of growth was shaky by 2007. Looking forward, the growth of deposits will depend to a large degree on China, where they are the primary savings vehicle.
Ever-deeper financial markets
Financial markets have been growing faster than global GDP for many years. As a result, financial depth, or the ratio of a country’s financial assets to GDP, has been increasing consistently across all regions. This deepening makes markets more liquid, improves access to capital for borrowers, helps to price financial assets more efficiently, and increases opportunities to share risk. In 1990, only 33 countries had financial assets whose value exceeded that of their respective GDPs. By 2006, this number had more than doubled, to 72 countries; Brazil, China, India, and Russia rank among those with financial assets worth far more than their gross national products. In 1990, only 2 countries had a financial depth exceeding 300 percent; 26 do today.
Several mechanisms help to deepen financial markets. One is the issuance of more publicly traded equities, as happened over the past decade with the privatization of state-owned companies in Western Europe, as well as in China, Eastern Europe,4 Russia, and other emerging markets. Another is the issuance of corporate bonds or asset-backed securities. In addition, bank deposits can swell with the growth of incomes and the appearance of new savings products, such as certificates of deposit and money market accounts. Rising equity values from stronger corporate earnings make markets deeper as well. Finally, rising asset prices and government debt can also have that effect. In 2006, with assets worth roughly 3.5 times world GDP, global financial depth increased to an all-time high. Nearly half of the increase came from growth in equities, largely the result of higher corporate earnings rather than increased price-to-earnings ratios.
Enron was simple theft and very poor management; Fan/Fred fiasco would not have occurred if the government didn’t back these “private” entities. Sufficient transparency enabled the short sellers to figure out Enron long before the collapse and the WSJ was on to Fan and Freddy years before their meltdowns. We don’t need more regulation.
we need less regulation as a philosophical principle
but those things must be analyzed, it is a SCIENCE not an sales pitch like the author’s try here
by the way WSJ is known lately as Wahabi Street Journal
Draper is a good company -
u guys funded SKYPE! Good work!
But now i hear SKYPE has a back door for listening to my conversations
Since i am involved in a what is best called as global underground resistance to communism:
with the sensitive stuff i have to discuss with my contacts- i have MANY questions.
Hotmail is another thing you guys funded.
Something i would advice never to use to everybody.
Well, SKYPE is still a working tool,
Thanks for that.
But i sense some moral vagueness your commercial attitude has
You know, enemy will target YOU before they target me, because you obviously are considered more of elite.
So sorry to say that but it is a fact.
You helped to create this self-destructing system the way it is.
Mr Draper has identified only part of the problem, the real problem is the subversion of the laws governing stock issuance are being fully subverted by systemic interests. The audio file under the caption tells the whole story.
Bud Burrell
July 12, 2008
Special interview:
The Greatest Crime in History (edit; aka… Too Corrupt to Remedy)
http://www.financialsense.com/fsn/main.html
dvd:
shocking, just shocking
its a war
We already have plenty of laws and regulations covering the prospect of force. fraud, and theft. The government has no business concerning itself with anything else.
It’s about freedom, and freedom works.
Roll back the Leviathan.
Jeff Perren:
well, it is much more complicated: regulations must WORK, not BLOCK
what do you think about this:
http://www.financialsense.com/fsn/main.html
?
naked short sales is just one way to ruin our system
securitizing of high risk mortgages as if they are bullet prove- is another dangerous method to attack us
oil industry fuel monopoly is one more
well, there are plenty of others, some of them in trillions
and the way those who are responsible for a dollar value perfoirm their duty is like on top of all of this
if we look at all the above with the calculator in the hand-
our system does not look like it is going to survive
I am surprised about the depth and also the high quality of content you have on your website, that you simply love to write really comes through. Grabbed the Rss, many thanks!