Is Sarbanes Oxley Creating a Moral Hazard?

I should start by saying that I have not fully fleshed out this stream of thought. It occurred to me this morning in the shower and it’s been knocking around my head all day (when I wasn’t trying to rebook a terrible day of traveling. Thanks snow!) So I decided to blog about it here and see if that helped me work through it.

I’ve been reading quite a bit about start-ups, venture capital, and most specifically venture capital returns in the last few months. Typically venture capitalists make their money when their investments “liquidate” through either an IPO or acquisition. Over the last 30 years there have been many hugely successful IPO’s including Google, Microsoft, Dell, Amazon, etc. This IPO’s are a huge engine of wealth creation and access to capital in our economy. Access to these capital markets can be critical to the success of business growth.

Recently, however, it’s become harder for startups to access these markets. The added regulatory requirements put in place by Sarbanes Oxley have made it significantly more expensive for young companies to launch an IPO (estimates put compliance costs at $2 Million or more). And, in addition to costs, SOx also introduces personal liability for the officers of the company.  Increasingly these young companies are turning to M&A instead. They seek out larger players in the market and negotiate a sale.

So what does this mean? In the short term, probably not much. Venture capitalists and their investors may see somewhat smaller returns and company founders may not see the extreme paydays (though Mark Zuckerberg seems to be doing just fine and I don’t hear Ev Williams or Biz Stone complaining at all). Additionally there might be somewhat slower job creation. But overall the short term implications are probably pretty small. The long term implications could be much larger. What happens if the trend continues and we develop a lack of new public companies? What if all new tech startups sell to Microsoft or Google or Apple? Will we eventually have an economy dominated by a few mega-corporations similar to the financial industry today? What happens in the next recession? Do we have to bail out these tech giants? Do they become “too big to fail”?

Or am I over-extrapolating and over reacting?

Good Talk,

Tom

What's The Worst That Can Happen?

Every day we are faced with a multitude of decisions covering a broad spectrum of things; what tie should I wear today? Should I ask her out?  Do I have time to stop for coffee? At what price point should I launch my product? Should I kill feature X or add feature Y? Can we afford to hire another person for this project? Can we afford not to? At times these decisions can pile up and become nearly crippling (the well used cliché analysis paralysis). We spend far too much time weighing options and worry about outcomes.  Often it’s a better idea to just DO SOMETHING! Don’t spend all your time analyzing and modeling and worrying. Ask yourself what is the worst that can happen and then just try something and see if it works.

I should note that this method will work for all businesses. Even if you have a business with huge product development costs, long development times and where changes are going to be really expensive you can still use this method. What’s the worst than can happen? Well, the worst can be pretty bad, so make sure you diligently analyze options and weigh costs.

But for most of us there is an innate bias toward overestimating risk and underestimating gains. It can be extremely difficult to overcome this bias, but asking what’s the worst that can happen is a good method. (Suzy Welch recommends asking what are the implications 10 minutes from now, 10 months from now and 10 years from now. I think this achieves much the same goal.)  The important thing is to realize that most decisions we make are not going to have huge implications. It’s usually better to make a decision, execute based on it, and then move onto the next thing. Because really, what’s the worst than can happen?

Good Talk,

Tom