Why Washington Needs To Hear From More Venture Capitalists (and pay less attention to Wall St. Analysts) on Telecom.

Reprinting below a piece I just posted over at the Public Knowledge Policy blog.

More below . . . .

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 part of the company and a “Chinese wall” prevents analysts from making recommendation based on the positions 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 ngredients, 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.

Stay tuned . . . .


  1. Great article, but I think there is a contradiction in your concluding advice to VCs. As astute as they may be at investment and management, anything a VC does as part of a Washington committee process will be a product of a Washington committee process. As awesome as they may be in their own environment, they can’t drain that swamp. I don’t think most of them would ever try. Instead, they’ll continue the attempt to imagine clever ways to avoid regulation altogether.

  2. Jess, I would go one step further and from the view on the other side of the table. VCs would be eliminated.

    When you have an environment where the State has taken over Finance, Auto production, possibly health care; to now permit the capitalist motivations of profit to outshine govt would not be acceptable to the political class. It would have to be stomped out or at a minimum co-opted with heavy regulation.

  3. JohnMc

    “State has taken over finance”????????

    If I may borrow a line from Barney Frank, on what planet do you spend most of your time? It’s precisely the other way around, fellow. I really didn’t think anybody disagreed with that. We, the people, just transferred hundreds of billions, if not trillions of dollars, to the finance industry. For which we the people got exactly what, in return? Nothing, as far as I can tell. Certainly we have not “taken over”.


  4. Jess & JohnMC:

    First, as always, I appreciate your comments.

    I think you fall into the fallacy of believing that you can ignore regulation, which is the fallacy that VCs and Silicon Valley generally has made. Because the regulatory apparatus of the state does not go away if you ignore it and refuse to play. If you desert the field, it is captured by your opponents.

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  6. Allan,

    Thanks for the heads up, but without some more info (like what makes you say this) I’m afraid that I can’t head off on a wild goose chase.

  7. Appreciate the appreciation.

    I guess the stance I’m imagining for our imaginary VC is more of a mindful ignoring than an ignorant ignoring. That is, she knows that a continent away there are people who seek to constrain her activities. She knows that competitors, vandals, Luddites, etc. will lobby those regulators as to the form of those constraints. She believes that just as they would be ineffective in her world, she will be hard-pressed to succeed in theirs. She might hire lobbyists, but she might decide that isn’t cost-effective. She believes in comparative advantage, and she knows the situations in which she is effective.

    If she decides she can’t win on a particular field of play, she may try to transfer the contest to another. If her server logs are subpoenaed, maybe she’ll rewrite her product so that no central server is used. If she is being forced into a particular relationship with a network provider, maybe she’ll find a way to use a different type of carrier that wouldn’t have this drawback. Maybe she’ll decide to open-source her code, and simply provide services to her users who will do for themselves what is now illegal. Regulators are not fast. If she can please her customers enough in the short term to make some money, she’ll let the regulators break their hearts later.

    And, finally, since we’re talking about a VC here, and not a superhero, maybe she’ll just decide to invest in different sorts of companies for the next fund. Once a company has seen enough success that it becomes a tempting target of regulators, she’ll have sold it and moved on.

    I’m not sure if your argument is (1) it would be more cost-effective to engage regulators than ignore/evade them or (2) it would be a good thing for regulation to be improved by her input. (I apologize if this is inadvertent caricature.) Your average VC will listen to supporting arguments for the first point, but will never have much time for the second.

    ps. JohnMc: Harold was careful to draw a distinction between those you might call capitalists as exemplified by the VCs and those you might call statists or corporatists as exemplified by large incumbent businesses. Please don’t blur that line by implying that financiers and their cronies on both sides of the public-private “divide” didn’t completely engineer the travesty that is TARP and its descendants.

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