Chris Nolan is worried about the unintended consequences of investment banks being regulated:
Secretary of the Treasury Hank Paulson was right when he noted on Monday that the reforms he or anyone else envisions will take years to enact. But, don’t worry, there will be legislation. Anyone who thinks that investment banks, hedge funds and their cousins, private equity firms are going to somehow escape federal government scrutiny is flat wrong. Their time has come…
The end result of all this is going to be something that no one – particularly not tech investors here in California – likes to think about. Can you imagine a Netscape public offering – the company’s main product was given away – sponsored by a financial institution supervised by the Federal Deposit Insurance Corp.? Me neither. So get ready for a more cautious and more prudent system of underwriting risk for sale in the public stock market. From now on, the growth curves for the creation, development and sale of companies – in all industries but particularly in the tech business – are going to get longer and more moderate.
So, if you’re a Silicon Valley VC, the time to think about retiring is right about now.
I think this is wrong on two fronts. For one thing, the proposed increase in regulation is in many ways a decrease in regulation, and there’s nothing in Paulson’s proposal to cause hedge-fund or private equity managers to lose any sleep worrying about being regulated in future.
And in fact many technology IPOs have been "sponsored by a financial institution supervised by the Federal Deposit Insurance Corp". Ever since the abolition of Glass-Steagal, the likes of Citigroup and JP Morgan Chase have happily run IPOs while at the same time being supervised by the FDIC.
But even if some new regulatory superagency were to take a stricter line on investment-banking activities, equities would be at the bottom of their list of concerns. If stock-market investors lose most or all of their money, the systemic fallout is minimal, as we saw when the dot-com bubble burst. What Paulson is worried about is not equity, it’s debt, and leverage. And Silicon Valley VCs – indeed, tech companies in general – tend to have very little in the way of debt.
As for companies whose main product is given away, I think that Google has proved once and for all that free can be an extremely compelling business model. Even regulators can see that.
Of all the areas where financial professionals work, then, I think that Silicon Valley probably has the least to worry about in terms of increased regulation – even if that increased regulation were actually going to happen, which it probably isn’t. Investment banks? Yes. Investors? Not so much.