Start-ups, not bailouts

April 4, 2010

We’re happy to find friends in unfamiliar places, and welcome allies from all corners to the fight… but this generally supportive op-ed from Thomas Friedman in The New York Times is most notable for missing the obvious:

In urging the country to support new business formation, and making policy recommendations to advance that cause, Mr. Friedman fails to mention venture capital even once.

We agree with Mr. Friedman that new businesses are critical to job growth.  We’d like to take this opportunity, while he’s on the subject, to remind him that the VC firms which provide the capital for many of these start-ups don’t ask for the bailouts he has supported for other industries.  Lastly, we’d like to suggest that he take that under advisement the next time he advocates financial reform which fails to distinguish between growth capital and the oft-demonized “Wall Street”.

We wonder if taxing the carried interest would be an issue on which he would join us in opposition to the approach taken by both the current Administration and much of Congress?  Both President Obama and the House of Representatives have proposed striking a devastating blow to new job creation by lumping venture capital firms in with hedge funds and leverage buyout funds in their quest to raise taxes on investment managers.  Fortunately, a number of U.S. Senators, attuned to the need for new job creation, seem to understand how this legislation would destroy the business model of small venture capital firms that invest in private growth companies in their home states.  If you tax job growth, you are certain to get less of it.


What were the odds that we’d receive our answer to the question of carried interest on the same op-ed page?  Here Friedman’s editors – on the same day – extol the virtues of raising the tax on carried interest while simultaneously failing to mention either venture capital or job growth even once.  It’s almost enough to make one doubt their understanding of job growth and capital markets…

To help them deepen their understanding, we’ll direct them to Future of Capitalism:

If the Times doesn’t get that, here is an example that should get their attention, or at least cause them to comprehend the issue: Between December 2007 and March 2008, two investment management firms, Harbinger and Firebrand, bought about $500 million of New York Times stock at about $18 a share. Over the past six months, with Times stock trading around $11 a share, they’ve reportedly sold about half the stake. That’s a long term investment on which Harbinger’s investors have lost tens of millions of dollars while New York Times executives Arthur Sulzberger Jr. and Janet Robinson have been borrowing money at 14% from Carlos Slim and giving their reporters 5% pay cuts while paying themselves $6 million a year. But suppose that instead of losing value, Harbinger’s investment in the New York Times Company had gained in value over the period from March 2008 to March 2010. Part of Harbinger manger Philip Falcone’s compensation comes as an interest in the fund. Had the NYT stock gone up, Mr. Falcone’s investors would have paid the long term capital gains tax, 15%, on the shares held for the period of more than a year. Why should Mr. Falcone be taxed on the New York Times investment at the ordinary income tax rate while his investors are taxed at the lower investment rate?

UPDATE II: (04.17.10)

Less than two weeks later Mr. Friedman sees a future that belongs to venture-backed companies.

Progress of sorts – but does he yet connect the dots between those companies he loves and their VC firms he loves to tax: if you tax the companies that fund the start-ups that create the jobs, you’ll get fewer companies funding fewer start-ups creating fewer jobs.

He does mis-categorize us “old money” but it might have just been a rhetorical flourish.  And in any event, we’re pretty sure he meant it as a compliment.

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