Blog I Meant to Write #1: Silicon Valley Rant

The end of the semester hit like a ton of bricks, so there are a few blogposts that I semi-composed in my head and left unwritten.  Plus this Associate Dean thing can make life a bit busy.  But lest I get out of the habit of blogging entirely, here’s a belated rant on Michael Malone’s WSJ opinion piece, Reviving the Flagging Spirit of Silicon Valley. 

Malone paints a picture of the vibrant, Wild-West Silicon Valley of yesteryear, where “anyone with brains, hard work, the guts to take real risks, and a whole lot of luck can become successful beyond their wildest dreams. That “anyone”—scientist, entrepreneur, secretary or receptionist—has a shot at the brass ring.” 

In Malone’s story

The great turning point came with the dot-com bubble and its bust at the turn of the century. The bust allowed powerful institutions to get their hands on a place considered too renegade, too independent, and too successful to decide its own destiny. The federal government, long believing the Valley’s great companies were not displaying sufficient fealty—i.e., lobbyists and campaign money—came down hard on the tech industry. And as we all know, the Valley caved.

Then came a series of regulatory handcuffs. First was Sarbanes-Oxley, sold to the public as a curb on the corruption of the stock markets by over-pumped IPOs. In reality Sarbox was a way for Washington and big, mature tech companies to suppress new competitive startups that would lure away their talented employees. Next came the expensing of stock options by the Financial Accounting Standards Board. 

I’m struggling with why my reaction to Malone’s op-ed is so viscerally negative. After all, I teach and write in entrepreneurship.  I like startups. And, for the record, what Malone says about the political economy is clearly right–it paid the price for thumbing its nose at Washington.  Silicon Valley now spends a lot more money on Capitol Hill, and has reaped handsome returns, viz the JOBS Act. 

Here’s the rub for me: A lot of the policy arguments for the JOBS Act amounted to “We don’t have as many IPOs/public companies as we used to!  That’s bad!  Let’s fix that!” To which I respond: How do you know what the right number of IPOs/public companies are?  Just because they used to be at a certain level–say, in 2000–doesn’t mean that’s the right number. Maybe there are other reasons why IPOs declined, that have nothing to do with U.S. securities law. 

To be fair, Malone ‘s gripe focuses on the fact that companies no longer widely distribute stock options to secretaries, receptionists, and the like.  He blames FASB’s move to expense stock options in 2004. But I keep coming back to Warren Buffet’s simple questions: ““If stock options aren’t a form of compensation, what are they? If compensation isn’t an expense, what is it? And, if expenses shouldn’t go into the calculation of earnings, where in the world do they go?”  FASB’s rules should make sure that a corporation’s books accurately reflect its finances. They’re not about social engineering or fostering startups. 

Malone mistakes correlation for causation thusly: “Say what you will, but the pre-Sarbanes, pre-FASB, pre-RSU Silicon Valley worked.”  It’s not clear that the pre-Sarbanes, Pre_FASB Silicon Valley world was sustainable, even in a world without Sarbanes-Oxley or options-expensing.  Moreover, his argument seems a particularly strange one given that Silicon Valley-style startups don’t need any encouragement right now.  A landscape with 83 private firms valued at $1 billion or more seems more bubblicious than moribund.

And, for the second time, get off my lawn.