Wednesday, October 12, 2011

Avoid Uninformed Knee-Jerk Decisions

On Sunday the Milwaukee Journal Sentinel ran a story about the venture capital legislation that was passed in Wisconsin in 1999. The story focuses on the one company that appeared to game the system and exploit the loopholes left by legislators and a governor that didn’t fully understand how to implement a venture capital (VC)program. In fact some of the same legislators involved in 1999 currently have an influence on the new venture capital legislation.

Sunday’s story focuses exclusively on one bad actor that took advantage of legislator’s lack of understanding in 1999. What concerns me is that legislators today seem to be positioning themselves to make even worse mistakes. Many of them seem to believe that by simply picking a different VC program that they will magically avoid such complications, bad actors and other problems. As a result some seem to be fast tracking what is known as a “fund of funds” based program. But there are serious questions that need to be asked about this venture capital approach and we shouldn’t rush into this or any specific program without having a full understanding of its risks and history.

Over the last few months I have repeatedly focused on the venture capital program in Oklahoma. That state has had a “fund of funds” program since the 1980’s. In fact “fund of funds” programs are sometimes referred to as the “Oklahoma Program”. What I learned about Oklahoma’s venture capital program was certainly alarming and legislators should certainly take note and avoid their mistakes.

Here are a few of the alarming details that jumped out at me:

Sunday’s Milwaukee Journal Sentinel story also highlights the fees involved in the previous VC program in Wisconsin. But it didn’t mention that all venture capital funds collect a 2.0-2.5% (even higher in Silicon Valley) management fee per year and that is not exclusive to just one specific kind of VC program. If legislators have an aversion to such fees, I certainly hope that they fully examine the subject. I especially hope that those who are trying to fast track the “fund of funds” approach actually check the level of fees often involved in that kind of program. They can end up being double the cost of fees in other programs. In fact in many “fund of funds” programs the fund managers end up collecting just as much in fees as the underlying VC firms that are actually doing the work.

As I have said in previous blog postings on this subject, I am not particularly dogmatic about the exact venture capital program that Wisconsin chooses. But I am concerned that some legislators don’t appear to have all of the information and yet they seem ready to rubber stamp one specific approach. Right now it appears that they are planning to fast track a “fund of funds” program without fully doing their due diligence. Legislators need to slow down, fully understand the details and the possible motives of those trying to influence them. They also must study what has happened in states like Oklahoma so that we don’t make the same costly mistakes. Venture capital policy is a complicated issue and what we certainly don’t need right now are uninformed knee-jerk decisions.

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