INVESTORS BUSINESS DAILY

Los Angeles, California April 21, 2009

Why Is Venture Capital Under Assault? By SCOTT S. POWELL

President Obama and Treasury Secretary Geithner recently declared a need to regulate venture

capital firms on the grounds they pose systemic risk to our economy. Nothing could be further

from the truth.

Venture capital is focused almost entirely on new technologies of small startup companies, the

failure of which assuredly has no effect on the larger economy.

Not only does venture capital in Silicon Valley and elsewhere pose no systemic risk, it provides

an essential engine of value-added innovation, invention and job creation. Perhaps more than any

other differentiating attribute of American capitalism, venture capital makes our model the envy

of the world.

Favors Big Business

So why would the Obama administration say they want to regulate venture capital firms? Some

suggest that it may be an end run in the undeclared war on wealth because venture capital can

create enormous fortunes outside of taxable income. But there are several other plausible

answers.

The first is that the Obama administration's faux pas resulted from a lack of understanding the

intricacies of the free market and conflating venture capital with Wall Street, banks and hedge

funds. If job-creating venture capital is elusive to our current political leaders surely we are in

deep trouble. How then can we trust their judgment on an ambitious restructuring of the national

economy, which next targets 15% of U.S. gross domestic product in health care?

A second possibility is that venture capital needs to be constrained, lest its free-market reliance

to pick winners and losers highlights the deficiencies of central planning and socialized sectors

of the economy.

As the administration attempts to regulate decision-making in every industry in which it gets

involved, price distortions and misallocation of resources will become glaring.

Venture capital needs no help from the government, except perhaps relief from bad laws like

Section 404 of Sarbanes-Oxley — a regulation that disproportionately hurts VC-backed startups

that can't go public without huge operating cost increases.

In remaining silent about this, the administration tacitly favors big business while neglecting

small-business capital formation.

The third and most plausible answer is the administration's distrust of venture capitalists is

simply an extension of its antipathy toward the free market. It suspects that venture capital seeks

economic returns over political ends and will not direct enough funding to politically favored

sectors — particularly after recent disappointments with clean-tech investments in fuel cells and

ethanol. Regulating VCs is an indirect but very real means of forcing alignment with the political

objectives of the administration.

Speak Up

In any case, U.S. recovery and progress is surely jeopardized if venture capitalists and

entrepreneurs are diverted from economic to political calculation.

There is plenty of blame to go around for our current economic mess, with moral ambiguity and

weak leadership from big business being increasingly acquiescent to the encroachment of the

federal government.

Now is the time for entrepreneurs everywhere and those specifically in venture capital and

Silicon Valley who delivered a disproportionately large Obama vote to speak up and demand

some candor and accountability about all this.

____________________________________

Scott Powell is a Senior Vice President of ELP Capital; a board member of Commerce Bridge

Corp., which provides venture debt financing; and a visiting fellow at the Hoover Institution.