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November 22, 2008

A Time Without Exits

Marooned on an island; adrift on a ship; locked in a seedy, spooky deserted mansion; lost in a cave – these are all staples of fiction. And these are all descriptions of the times we live in from an entrepreneur or VC point of view.

All the exits are shut. No IPOs for the foreseeable future. Google and Microsoft and Yahoo and Cisco aren't buying. Even the successive waves of VC capital at ever-increasing valuations are no longer there to float the stranded ships off the beach.

What to do?

VC Fred Wilson suggests that the rules which govern public sales of stock be loosened. He posts that even those willing to invest in these troublesome times are legally precluded from investing in the Union Square Ventures portfolio companies"

"I've written extensively that we need a secondary market for privately held shares of venture backed companies that want or need to stay private. This is already happening with Facebook shares and it's going to happen with the shares of other privately held companies going forward. The public markets have failed to solve this problem so it's going to get solved in some other way.

"We also really ought to find a way for small investors who know what they are doing to place a small bet on a company they really like. And companies like Boxee and Twitter [nb. USV-backed companies] could really benefit from that too.

"This is the year that the banking and brokerage industries have completely let us down. They have failed to invest our money wisely. And the regulators who set the rules, the very regulators who make sure that no reader of this blog can invest in one of our deals, have allowed that to happen."

Fred is defying current conventional wisdom by suggesting less regulation rather than more. But Fred knows well that laws likes Sarbanes-Oxley, which were well-meant to protect investors from frauds like Enron, have instead restricted the ability of young companies to grow and made it impractical for many of them to tap public markets even when the public markets were still open. Fred knows that an SEC which focuses on the minutiae of every public statement a public company makes (which IS their job) somehow missed the fact that publicly traded banks were insolvent and their financial statements (with hindsight) meaningless.  Fred knows that the all the enormous amounts of money which public companies spent on "independent" outside auditors cut into the capital available for growth and still didn't expose the fact that some of the country's top financial institutions were naked emperors.

What Fred didn't say – but I will – is that the appearance of regulation may have lulled investors into a false sense of confidence in the wrong institutions.

What do you think? Has regulation succeeded in locking all the exit doors with investors trapped on the wrong side? Or do we need even more regulation? Or different regulation?

The answers' not easy. Getting it right may be crucial to our economic future.

 

 

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