It's the Liquidity, Stupid

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


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