< Browse > Home / Financial Literacy, Management, Private Equity, Venture Capital / Blog article: Does Venture Capital Pose a Systemic Risk to the Financial System? Tim Geithner Thinks So . . .

| Mobile | RSS

Does Venture Capital Pose a Systemic Risk to the Financial System? Tim Geithner Thinks So . . .

A recent opinion piece in the Wall Street Journal got me going the other day.  Apparently the technology venture capital industry is a source of systemic risk to the overall financial system.  At least that’s what Secretary of the Treasury Tim Geithner thinks.  To quote the article:

“Here’s a stumper: In the Treasury financial reform proposal, who comes in for more regulatory retooling: Fannie Mae, or your average 14-man venture capital shop? If you said venture capital, you understand why one of America’s greatest competitive advantages is now at risk in Washington.

As part of their regulatory redesign, Team Obama and Congress still don’t have a plan for reforming the giant taxpayer-backed institutions like Fannie that caused the credit crisis. Yet they’re moving to rewrite the rules for investing in tiny technology companies that had nothing to do with the meltdown. Under the proposed rules, venture firms will be declared systemic risks until they can prove themselves innocent. The typical venture capital (VC) firm has nine principals plus five support staff and doesn’t use leverage. Yet Treasury Secretary Timothy Geithner wants VCs to be regulated as investment advisers by the Securities and Exchange Commission.

The entire VC industry invested a total of $28 billion in start-ups last year. To put this number in systemic perspective, that’s less than half the amount Bear Stearns was borrowing every night before its collapse. Unlike a Bear Stearns or Lehman, venture capitalists aren’t borrowing the money they invest in small businesses. There is no risk beyond that borne by the investors and the companies they fund, and the risk isn’t very big. All U.S. venture funds combined add up to less than $200 billion. Mutual fund companies like Vanguard and Fidelity each manage more than $1 trillion.”

The seeds of this policy were laid late last year in a bill sponsored by Senators Grassley & Levin entitled the Hedge Fund Transparency Act of 2009.  Steam has picked up this spring and summer with the Administration’s drive to rework the regulatory system for the financial services market.  Evidently the primary driver behind this policy is a concern that hedge funds will declare themselves to be venture capital firms to escape reporting requirements and further scrutiny.  The opinion editors at the WSJ point out

“VCs are nonetheless critical to America’s ability to stage an economic rebound. While early-stage venture investments are tiny by Wall Street standards—often $3 million or less—they are a big part of the reason the United States has for decades grown faster than other industrialized economies. Companies once backed with venture capital now generate more than 20% of U.S. gross domestic product. Looking forward, will America be better off if venture investors are justifying themselves to Washington regulators, or evaluating new software platforms?”

While I personally agree that there is a need to better regulate systemic risks in the financial markets, I do not believe that adding more burdens onto the struggling venture capital industry is the best investment of regulatory resources.  Inevitably, however, more regulation is coming.  I wonder how long it will be before an enterprising VC funds a SaaS/Business Process Outsourcing company that will provide regulatory compliance services for small to medium sized VC firms?

Leave a Reply 10946 views, 2 so far today |
Follow Discussion

One Response to “Does Venture Capital Pose a Systemic Risk to the Financial System? Tim Geithner Thinks So . . .”

Trackbacks

  1. DevelopmentCorporate » Blog Archive » So Private Equity Isn’t Evil After All . . . .  

Leave a Reply


Warning: fopen(/4255305384_8e90aec34c_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
carriedint3
Warning: fopen(/4255305348_5022eca28d_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
carriedint2
Warning: fopen(/4254540579_b296f43c7b_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
carriedint1
Warning: fopen(/4255305256_2b68d522d5_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
Money machine
Warning: fopen(/4254540331_8836e369cc_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
manrev2
Warning: fopen(/4255305016_138cd3d3eb_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
ManRev1
Warning: fopen(/4255304954_48dd4292dd_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
idea2
Warning: fopen(/4255304438_ed7edfa4a2_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
chain-links2
Warning: fopen(/4254539541_30a19becda_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
ipasplash
Warning: fopen(/4254539317_1e015d3629_s.jpg) [function.fopen]: failed to open stream: Read-only file system in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 187

Warning: fwrite() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 189

Warning: fclose() expects parameter 1 to be resource, boolean given in /nfs/c02/h05/mnt/20615/domains/developmentcorporate.com/html/wp-content/plugins/flickr-rss/flickrrss.php on line 190
ipasplash