There are a number of ways the Bush Administration and its appointments can effect the robustness of the emerging growth sector, that element of the economy in which venture-backed, early stage companies tend to operate.
First, of course, there is one obvious point: if the new Administration can keep the economy boiling along on all eight cylinders and that translates into a booming stock market, obviously all sectors will benefit. The VC economy is particularly sensitive to the IPO market. Nothing makes VCs reach for their checkbooks faster than the assumption they will be able to get their companies public at fancy prices. It has always been curious to me why people investing today are as influenced as they are by the state of today's IPO market. The companies in which today's investors are making private equity investments will not be eligible for public distributions for on average two or three years. And, since the IPO market is extremely volatile (as we have seen yet again in May of this year), there is no reason to believe that the current status will continue into the future unchanged. However, in the absence of evidence which would allow one to make a forecast, one simply projects the present into the future, despite all the books that tell you that extrapolating the past is, without more, a classic fallacy.
The second influential factor is taxation, and particularly taxation of capital gains. In that regard, there are true believers advising Bush, supply side economists who believe that capital should not be taxed at all. Were that to happen, which it won't, they believe a lot of new players would appear from the woodwork to plunk down money on the chance of dramatic capital appreciation. It is unlikely, however, in what is in effect a coalition government, that a capital gains cut, which openly favors Al Gore's favorite "1 percent," would make it through the Congress. No change, in short, is anticipated in that specific direction; across the board cuts, yes, targeted capital gains cuts, no. In fact, a deep tax cut, if it is deemed inflationary could (almost certainly will) trigger moves by the Federal Reserve to hike interest rates based on Chairman Greenspan's constant concern about inflation. Venture-backed companies tend not to be particularly interest rate sensitive except and to the extent interest rates depress stock prices by attracting capital into bonds. And, unless he quits on his own or gets hit by a truck, Greenspan is the tenured chairman of the Fed.
Anti-trust policy is an obvious point of interest. The conventional wisdom is that, the Bush Administration will seek an accommodation with Microsoft to avoid what it perceives be to an almost certain reversal of Judge Jackson's decision. Joel Klein, Clinton's man, had revived the Department's anti-trust efforts and made them a good deal more energetic than they have been since the pre-Reagan days, before my colleague (the late Bill Baxter) introduced a strong element of laissez faire. The laissez faire argument against Klein's view is twofold: First, that business is now truly global and looking at markets within the United States is too narrow for measuring a potential Clayton Act violation (Section 7 of the Clayton Act governs mergers, generally or Sherman Act violations); moreover, the obsolescence built into the high-tech economy means that Microsoft's perceived advantage, even if based on monopolistic practices, will disappear in due time and no matter what the government does. These arguments may have more traction now that the Bush Administration is in the saddle.
Immigration policy is a big item for the VC community. Again, it is likely the Republicans will back a merit-based immigration policy, versus a compassionate system which emphasizes family relationships. And, that change, if pursued, favors high-tech employers. As the world goes high-tech, the labor force necessarily becomes international and domestic employers would love to get their hands on Indian and Bulgarian computer scientists.
On the issue of lifting the ban on sales taxes on the internet, the betting in this corner is that there will be no change. With a divided House and Senate and a President without any specific mandate, the odds are that inertia will govern in all but the most critical areas; a hot potato like taxing internet sales will simply be left alone. There will not be enough political capital owned by the Bush Administration, regardless of its predilections, to start monkeying with potential "third rails."
Finally, the venture capital topic de jure is shifting as we speak (for however long it lasts) away from information technology and telecom and once again in the direction of biotech, particularly now that the human genome has been mapped and the data is available on the internet, "medicalinfomatics" is a popular buzz word. Here, the Bush Administration may be disappointing, based on its credo that less government is better in almost every instance . other than perhaps national defense and criminal justice. The amounts necessary to exploit the potential advantages of genomics are so extraordinary, the sector is likely to be highly dependent on R&D budgets at, for example, the National Institutes of Health for fundamental (versus applied) research. It would appear, at first glance, Bush and his advisers are not R&D spenders, except perhaps in defense (which could prove helpful) and alternative sources of energy.
Joseph W. Bartlett, Special Counsel, JBartlett@McCarter.com
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