Silicon Valley Is Not Wall Street
Tom Perkins.Wall Street Journal.(Eastern edition). New York, N.Y.:Feb 25, 2010. pg. A.13
Abstract (Summary)
In 2009, a year with nearly universal shrinkage in employment, 35,000 new jobs were posted on the job board StartUpHire.com, all created by companies backed by venture capital. [...] the managers of venture capital firms, usually partnerships, are not risking capital raised from the general public or guaranteed by the federal government.
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Too often, there is confusion between investment banking and venture capital. This isn't helped by investment bankers' occasional assertions that they too do venture capital. They don't. In light of the attention both of these activities have lately received in Washington, it seems a perfect time to explain what makes them so very different.
Venture capitalists work with entrepreneurs to start new companies from the ground up. We earn our reward only when companies become successful.
Investment bankers are deal makers. They're in charge of bringing companies public and advising on acquisitions. Their money is earned by the transaction, and in the fraction of the time it takes a venture capitalist to realize a profit.
Whereas Wall Street has been the source of what feels like endless scandals and financial catastrophes, venture capital has created jobs, jobs, and more jobs of the highest caliber. It's no surprise that Silicon Valley's Sand Hill Road in Menlo Park has been the locus of our national high tech activity and the envy of the world, while Wall Street is secure in its reputation as the planet's frequent scourge.
The facts speak for themselves. Approximately 11%, or 12.1 million, of private-sector jobs reside at companies that were founded with venture capital. These companies include Intel, Genentech, Google, FedEx and Starbucks. Another 500,000 jobs are currently housed in newer start-up companies that are still privately held, and are poised to grow exponentially over the next decade.
In 2009, a year with nearly universal shrinkage in employment, 35,000 new jobs were posted on the job board StartUpHire.com, all created by companies backed by venture capital. This job creation has occurred in every one of the 50 states. Wall Street's share? Zip, zero, nada.
Yet the politicians on Capitol Hill don't seem to recognize these differences. Venture capital is constantly at risk of being swept up in federal tax and regulatory initiatives aimed at curbing Wall Street's abuses.
Last year our industry was originally included in new SEC rules aimed at hedge funds and other sources of systemic risk. But the managers of venture capital firms, usually partnerships, are not risking capital raised from the general public or guaranteed by the federal government. They are not financial advisers in any sense of the term.
But the default mode in Washington is to regulate broadly, without regard for unintended consequences. Thankfully, Congress listened to our concerns and ultimately exempted venture capital from these rules. Still, it was an arduous process to help them understand who we are. That process continues.
Our industry is a very patient one. We invest over the long term, striving for capital gains. And we invest continuously in bull and bear markets.
As Wall Street came to a screeching halt in 2009, our industry nevertheless invested more than $17 billion in emerging companies. Many of those companies will take a decade or more to mature. It would be killing the golden goose to tax venture capitalists as if they were hedge fund or investment banking casino operators.
How has our industry been able to keep its skirts so clean and continue to serve as our country's economic engine? Why is it so unlike the age-old crash-and-burn pattern of Wall Street? I think the answer goes back to venture capital's earliest days in Silicon Valley (before the name of that place had even been coined). The first practitioners, including Eugene Kleiner and me, had familiarity with Wall Street operators and we set up our partnerships to avoid specifically problematic practices.
These parameters included: no leverage; audited statements; never investing personal capital where the partnership could or should do so (that is, no "cherry picking" at the investors expense); no profit participation until the investor's entire capital had been repaid; limited partnership life and no investments of new capital in older deals. These early ideas have become nearly universal over the decades. And in my opinion, they have kept our industry healthy, profitable and largely scandal-free.
It is time the venture industry is rewarded for the work that we do and how we go about doing it. We are not asking for bailout money or additional tax breaks. We simply want those in the Beltway to leave us alone and let us do our jobs -- which means creating more jobs for our country.
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Mr. Perkins is a former president of the National Venture Capital Association, a partner emeritus of Kleiner Perkins Caufield & Byers, and author of "Valley Boy: The Education of Tom Perkins" (Gotham, 2007). He is a director of News Corporation.
Credit: By Tom Perkins