Governance regulations hurting the labor market for start-ups

Posted by Marc Hodak on February 28, 2011 under Invisible trade-offs, Unintended consequences | Be the First to Comment

A story today describes how start-ups are having problems:

Internet start-ups across Silicon Valley are struggling to compete for talent amid the investment frenzy gripping Facebook Inc., Twitter Inc. and Zynga Inc., with many smaller companies beefing up pay and recruiting and wading into the private-company share market to keep pace with their larger rivals.

Silicon Valley is full of world-class engineers sleeping on futons and living on ramen noodles.  These (mostly young) people accept company paper instead of the decent cash that their talents could easily justify for the privilege of toiling 14 hours a day in untested ventures.  This system depends upon well-functioning equity markets to secure this manner of devotion.  Public equity markets enable those making the gamble to see the payoff sooner.  Bill Gates has said that Microsoft never needed the public capital for investment in growth; the company went public to so that its 10,000 paper millionaires could become actual millionaires.  Many of them would go on to fund or work in other start-ups, and their example has fueled many more.

Today, our IPO market is broken.  That avenue of exit has been crushed by the weight of governance regulations, especially Sarbanes-Oxley.  These rules were intended to restore confidence in our public markets.  They have, instead, prevented ordinary people from investing in maturing companies like Facebook, Twitter, or LinkedIn, and hampered the ability of companies like that to attract the talent they need to get going.  Such companies are now forced to go to private markets for liquidity, markets that are far less accessible to smaller firms than IPOs used to be.

We will never know how many Microsofts or Apples have not been able to get off the ground since 2002–the year SOX was passed–or may not in the future, because of the higher cost of securing needed talent.  Unfortunately, the people who proliferate these rules like Topsy are not accountable for what doesn’t get created.