Regulation, Venture Capital and Economic Growth 

Regulation, Venture Capital and Economic Growth 

    Posted in : Opinion:
  • On : May 06, 2015

Here is a great, real-world, tangible example of how excessive regulation costs us jobs and harms economic growth.


I have invested as an angel investor in a few deals for tech startups.  I have lots of access to great venture capital deals in the Bitcoin space.   I’d love to expand this a bit.

I already run an investment firm and have actually placed billions of dollars in investments.  However, those investments are mostly public companies or occasionally private deals which are run by something like a major private equity firm:  our structure isn’t setup to make investments in venture capital deals…to do that we’d need to create a new fund.

I’m thinking about setting up a very small VC fund for myself and a few friends.  Since I don’t have the team to run a large fund and fundraising for a new fund is hard…even for someone like me who’s career is in investment fundraising, and because the deals and company size is small, the plan would be to start very small such as a few million dollars and build a track record.

I spoke with a mid tier law firm last week about the legal setup costs of such a fund:  the cost is $250,000.   (Accounting would be another $50k +)

This is a bit high but not surprising at all.  I’ve dealt with many expensive lawyers for years.  A top tier firm could charge even more.  Now this doesn’t even include legal costs for actual deals….just the very simple fund structure to be allowed to accept money from investors.

Why so high?  Because of massive regulation that is supposed to protect consumers.  

Ironically, venture capital funds are limited to accredited investors:  basically rich people are the only ones allowed to invest in the types of funds which, in the past, have invested in the best returning early stage companies like Facebook, Twitter and so on — this is because such investments are very risky and the politicians have decided they are too risky for people other than the very rich folks to invest in.  

Even with that restriction, creation of a very simple fund and it’s accounting makes the cost effectiveness non existent.   It makes no sense to spend 10% of investment capital on legal and accounting fees on a tiny $3 mil fund….that $300,000 would be far better spent on investing in actual companies….you could make six $50,000 seed investments in six different companies…companies who could really use that funding.  That’s six companies who could get extra capital and expand.  I know some great startups who could really use that money and I’d be thrilled to help them…I’m not so thrilled about forking over hundreds of thousands of dollars for legal documents in an already experimental and risky endeavor. 

More importantly this type of regulation prevents some things which could help economic growth from ever being done in the first place.  At $300,000 I’m simply not going to setup such a fund.  I’d either need to 1) scale up and make the fund larger so it’s more cost effective …this adds to risk 2) find far lower cost ways to do so or 3) skip the whole idea and remain a solo angel investor.

I don’t believe this is what’s best for innovation, jobs and the economy.

For every many well meaning regulations there is an unintended consequence.

Irony: since I’m mentioning this potential idea for a fund on a public forum I also need to make the disclaimer that this in itself is not an offering of any securities, that I am not soliciting an investment and that VC and Bitcoin investments are extremely risky and can cause investors to lose every penny they invest.  Please always read the legal documents of any investment you make.