Why Washington Needs To Hear From More Venture Capitalists (and pay less attention to Wall St. Analy
Why Washington Needs To Hear From More Venture Capitalists (and pay less attention to Wall St. Analy
Why Washington Needs To Hear From More Venture Capitalists (and pay less attention to Wall St. Analy

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    The August 19 Wall St. J. contains an op-ed from former hedge fund manager Andy Kessler that at first blush looks like someone here at PK might have written it. Kessler starts with Apple blocking the Google voice ap, and runs through the way spectrum auctions re-enforce industry structure and lock in a tight oligopoly that damps innovation and allows those companies that actually have a pipe to charge ridiculous prices for services such as text. He notes that because mobile services are critical to our economic growth that this holds back economic development, and observes that it massively overcharges consumers. He concludes by recommending a set of changes familiar to anyone who has looked at our issues page: 1) adopt a wireless Cartefone rule that will allow any device to attach to any wireless network, and run any application that does not harm the network, 2) Move away from the idea that licensees “own the airwaves” and rely more on spectrum sharing, [for example, by opening the opening the broadcast white spaces] and 3) adopt a national broadband policy that will ratchet up the available capacity and speed to homes and mobile devices.

    (Kessler also calls on Congress and the FCC to eliminate exclusive video franchise deals, but Congress already did that in 1992, and the FCC substantially limited the ability of local franchise authorities to negotiate terms of competing franchises in 2006, so I'm not sure what he's talking about here.)

    That this op-ed appears in the Wall St. Journal, a bastion of anti-government free market absolutism, highlights an important point about telecommunications policy that I touched on in my CNBC appearance on antitrust last month: telecom reform is not anti-business v. free market or even tech v. network operators. It's a fight between a wildly competitive Darwinian world favored by venture capitalists and new entrants v. the much more stable world of existing companies beloved of Wall St. analysts.

    VCs and the new entrants they fund need Darwinian cut throat competition and chaos. The VC model is fund a bunch of things, see what survives and grows, sell it off, and move on to the next bunch of new things. For that to work, you need an environment where new companies can come in and disrupt everything, take business away from established companies, or create whole new lines of business without waiting for permission or cutting anyone else in for a skim off the top. That's why VCs fund so many companies. For every Google or Amazon multibillion dollar success, there are thousands of wannabes that either die in debt or barely pay pack the investment.

    Wall St., for all analysts pay lip service to loving competition and the free market, hate that kind of Darwinian competition and unpredictability. They want companies with clear and predictable business lines they can study and understand, reliable growth based on an ability to exclude others and lock in customers, and — above all else — no surprises from possible upstarts who could kick over an entire industry business model in a single quarter and make accurate and reliable predictions impossible. Consider the simple truth that stocks trade on the expectation of future earnings, and you will understand why the idea of a world where past performance tells you absolute bupkis about future performance gives the analysts and large investment banks that rely on their predictions of future returns such heartburn.

    Unfortunately for policy, Washington pays a heck of a lot more attention to Wall St. analysts than it does venture capitalists. I say “unfortunately” not merely because more VCs agree with me than Wall St. analysts. I say “unfortunately” because when it comes to creating jobs and creating wealth, the VC model of funding lots of companies and selling off what succeeds works a heck of a lot better for the economy as a whole than the slow and predictable growth favored by Wall St. It's not that Verizon and Comcast don't hire folks as they get bigger — of course they do. But they don't create nearly as many jobs, or spread them through so many sectors of the economy, as hundreds of small start ups hiring tens of thousands of people and rippling that job creation outward.

    So why doesn't Washington listen to VCs more and Wall St. analysts less? In part, its because of who shows up in Washington and the willingness to engage. Wall St. analysts have always paid close attention to Washington and regulators because of the impact on stock prices. They cultivate relationships here and understand the value of influencing policy for their investments. (Yeah, yeah — many of them technically work for a different part of the company and a “Chinese wall” prevents analysts from making recommendation based on the stock positions of their colleagues across the hall; that's nice.) Now add in a culture in DC and policy circles generally that exalts the wisdom of the all-perfect, all-knowing, uber-efficient “the Market.” Given these two ingredients, you can see why Wall St. analysts get so many invitations to speak at Congressional hearings and why regulators routinely attend Wall St. sponsored investment conferences to hear a non-stop mantra against any form of regulation contrary to incumbent interest.

    VCs, by contrast, hate Washington and regulation, think Washington is a sinkhole for losers, and don't want to invest time in cultivating relationships with folks who they consider idiots who “don't get it.” VCs live in a world where people make decisions about investing hundreds of millions of dollars on the basis of a five minute “elevator pitch” and expect that when they cut a check a company gets up and running. The idea of spending months — even years! — meticulously building a case and a climate for regulatory reform when the right answer is blindingly obvious drives them to distraction. They're much to busy going on to the next deal and figuring out how to make money to try to influence policy. Indeed, it's a sign of how difficult developing new businesses in the face of market power has become that we now see the occasional VC or Silicon Valley entrepreneur doing a DC drive by.

    There's been a lot of talk about how the experience of folks like NTIA-head Larry Strickling and FCC Chair Julius Genechowski with start ups and venture capital will make this a more “tech friendly” regulatory environment — by which commentators generally mean changes along the lines proposed in Andy Kessler's op-ed. While it may make them more receptive to certain arguments, the essential truth about public policy in telecom or anywhere else is that only those who come to the table and make their voices heard actually influence policy decisions. VCs and others concerned about innovation and investment in new businesses still need to show up. And, more important, they need to show up ready to build a case, work through the details with staff, and stay for the long haul. This is a town where a take or leave it elevator pitch — or even a good op ed in the Wall St. Journal — simply will not cut it.