Venture Capitalists Fib to Stop Regulation

Today's New York Times' Op-Ed "Stopping Start-Ups" by venture capitalist Alan Patricof and a former insurance regulator Eric Dinallo is such an extraordinary fabrication it demands a response.

Patricoff and Dinallo are arguing against supervision of venture capital by the SEC under laws proposed in Congress. 

Venture capital has become an extremely corrupt business, where billionaires and centi-millionaires exploit lack of regulation to loot the stock market, and strong-arm pension and capital firms that invest in venture firms. 

Patricoff argues that that all financial risk in VC-client-firms is internal: "there can be no domino effect in the world financial system."

Could Patricoff have possibly kept a straight-face while writing that? Does he seriously believe they New York Times' readers are so short-sighted they've forgotten the Dotbomb and telecomm busts that devastated the stock market?

Does Patricoff truly believe that VCs can flip hollow, profitless companies to the stock market, collect extraordinary profits on these shell companies, then wipe their hands of responsibility for the losses that follow? 

Patricoff laments the decline in IPOs. The last thing the American financial systems needs, as it tries to heal from decades of damage done by financial manipulation and easy money, is another bubble inflated by corrupt IPO flipping of valueless companies. The IPO system requires longer discussion, but basically VCs turned NASDAQ into a Ponzi scheme by working with unscrupulous underwriters, such as the disgraced Frank Quattrone, where under-writers took flimsy companies to market, gave public shares to insiders before they were available to the larger market, allowing them to immediately turn a profit, often flipping the shares in one day, while contributing nothing and shifting all the risk to individual investors. 

Venture capital firms no more create wealth and jobs than Enron created energy -- VCs get rich by transferring money from individual, public share holders to venture partners and the people whose palms they grease.

Next, the VC tries to justify the contribution of venture funds by citing firms they have "started"; amusingly he includes Google. Actually, the search giant is a prime example of how there is, as the phrase goes in Silicon Valley, "no 'venture' left in venture capital". Google was founded on private capital and only went to venture firms for a second round of funding. There are two reasons for this: First, venture firms increasingly avoid start-ups, leaving that work to so-called angel funds and individuals and secondly, that VCs are too greedy so start-ups are avoiding them when possible. The leading high-tech companies including Microsoft and Oracle were not started with venture capital.

The final canard is that VCs don't leverage their investments. While literally true this ignores the trendy scam VCs pull on their client companies by using warrants that are convertible into equity. This allows VCs to do an end run around the intent of bankruptcy and dissolution laws (which give lenders priority over owners) by being either lenders or equity holders or both at once at their sole discretion. 

Regulation of venture capital is needed to prevent more dot-bomb fiascos, reduce the fleecing of pension funds by VCs, eliminate the corruption of IPO flipping, and help restore stability to the financial system.