00:00hi everyone welcome to the Asics and Z
00:02podcast I'm sonal and we're continuing
00:04slash starting our series today on how
00:07the outcomes of the election and Beyond
00:09affect tech in this episode in
00:12particular Capital Markets VC etc
00:14joining us to have this conversation we
00:16have our managing partner Scott Cooper
00:17and we have Bobby Franklin the president
00:20and CEO of the National Venture Capital
00:23Association welcome guys great thanks al
00:26thank you for having us I mean one very
00:27obvious question to just kick things off
00:29is how do elections affect markets like
00:32market behavior in general you know and
00:34obviously look whether it's a Democrat a
00:35Republican certainly and what their
00:36ideas are obviously matters but at a
00:38higher level what you tend to see is
00:40particularly when you have new
00:41administration's coming in this kind of
00:43excitement about what new policy can do
00:45to help stimulate growth in the overall
00:47economy you see this a lot in what's
00:49playing out today in the Trump rally
00:50right that a lot of people on Wall
00:51Street talk about which is if you look
00:52at the major stock market averages over
00:54the last two months in general it's been
00:56pretty much an up and to the right and a
00:58lot of that is kind of excitement and
01:00saying hey based on what we heard in the
01:01campaign if they actually do some of
01:03these things they might be you know net
01:05stimulative to the economy and then I
01:06think what happens is reality sets in
01:08the reality of the Washington process
01:11which is these things take time to get
01:12done and there's reconciliation and all
01:14these other things that have to happen
01:15yeah the way we think about it in
01:17Washington is when you when you have an
01:20election and particularly when you have
01:21results of election where the White
01:23House and Capitol Hill both House and
01:26Senate or aisle now controlled by the
01:28same party there's this optimism that
01:31okay less gridlock actually things will
01:34get passed things will get done when you
01:37actually get people in place and when
01:38you would put a bill on the floor of the
01:40House or Senate and you start to deal
01:42with the White House now you're starting
01:44to realize that well that's actually
01:47harder than it was talking about it on
01:49the election trail so that's where the
01:52reality sets in and it starts to get
01:54really difficult could there be a
01:56relaxation on things like Volcker rule
01:59in the capital markets the Volcker Rule
02:02was something that had been put in place
02:04which effectively kept banks from being
02:08able to make investments into you know
02:11VC funds or other funds
02:13into startups so for a large swath of
02:16the country between the coasts frankly a
02:19lot of the so-called red states have
02:21felt a little left behind from the
02:24economy and you don't see as much
02:27activity there she do in California New
02:30York and Massachusetts and other places
02:31god that's fascinating about the boca
02:34rule because i finished reading the
02:35hamilton biography and one of the
02:37screams it's just much might was
02:39mind-boggling to me reading it is how
02:41things that were playing out 200 years
02:43ago are absolutely playing out today and
02:46one of the biggest conflicts was between
02:48the creation of banks in new york versus
02:50in like rural areas how to participate
02:52in the capital you know means anyway
02:55it's just fascinating
02:55yeah it's turns out alright what's the
02:57saying there's no new problems there's
02:58just new solution you in the
03:01organization that you represent
03:02obviously have been in DC for a long
03:03time so you have a lot of insight
03:05baseball probably on how this stuff
03:06works but one of the things that I find
03:08interesting when I talk to people out
03:09here in Silicon Valley is you know it's
03:11great to read the headlines but how does
03:12this stuff actually work how do you
03:14think about what happens in the first
03:15hundred days what happens the first 12
03:17months the actual mechanics of going
03:19from what is possible to actually
03:21rolling out you know a signed piece of
03:23legislation full disclosure the NVC a is
03:26a lobbying organization the NBC is
03:29created in the 70s and we're the
03:32lobbyists for this industry so when you
03:36think about a transition and a new
03:38administration coming in and what
03:40happens in the first few months and what
03:42happens first hundred days and six
03:44months and twelve months well what we
03:46know is for a four year presidential
03:49term the first two years are where the
03:53big things happen and then the next two
03:56years is when you're thinking about you
03:58know we running for a second term so
04:01from the White House perspective having
04:04a new administration it's first all
04:06about your cabinet picks so we're in the
04:09midst today of all of the confirmation
04:12hearings in the Senate for cabinet picks
04:16and that's what all the talk is then
04:18once they get in they'll start picking
04:20assistant secretaries and deputy
04:23assistant secretary so the staffing up
04:27at the political level which is the
04:29leadership level of agencies and
04:31departments takes some time what are the
04:35specific agencies and/or cabinet picks
04:38that actually affect the things that
04:40we've been talking about in this podcast
04:41just so we know with who they are and
04:43who to kind of watch sure well obviously
04:46who is running the Department of
04:50Treasury has a lot to say about tax
04:53reform I mean that's where the IRS sits
04:55under that's where the assistant
04:58secretary of tax it's so they when the
05:01administration weighs in on what they
05:03would like to see in tax reform that's
05:06the department that will come forward
05:09there are also these independent
05:11agencies like the Securities and
05:13Exchange Commission so when we're
05:15thinking about rules around capital
05:17markets and we're thinking about
05:19crowdfunding and we're thinking about
05:22what that on-ramp and the IPO market
05:25looks like a lot of things happen at the
05:27SEC and and the SEC Securities Exchange
05:30Commission like the FCC Federal
05:33Communications Commission typically are
05:35what are known as independent agencies
05:37with five commissioners and three no
05:42more than three can be from the same
05:43political party so the way you think
05:45about it is whoever is the occupant of
05:47the White House will get three picks now
05:51there are staggered terms etc but there
05:53likely to be three Republicans
05:55commissioners at the SEC the FCC the FTC
05:59on privacy and other tech related issues
06:01so that's how we think about staffing up
06:05a new administration but if we kind of
06:07you know drop down to our ecosystem the
06:09broader venture ecosystem we think about
06:11kind of younger early-stage companies
06:13how do you think about kind of what if
06:15anything might be of interest for people
06:17to follow you have to recognize
06:19Washington is really a big company town
06:22I mean if you think about it once you
06:24become a big company you're gonna have a
06:26Washington office you're gonna have a
06:29lot of folks running around and when you
06:31have so many voices talking to
06:33policymakers on the tax writing
06:35committees about what's important to
06:38this fortune 500 company or that fortune
06:41company it tends to sort of drown out
06:43everything else and I think that's one
06:46of the biggest challenges for the
06:48startup community is until you get to be
06:51a big company you don't have the
06:52resources to really engage in this we
06:55have to make sure that as policy makers
06:59are thinking about tax reform that we
07:03don't forget that tax reform could be
07:06used to encourage capital formation and
07:10and entrepreneurs to take risks over
07:13long periods of time and let's not
07:15forget that you know or do something for
07:19current companies at the expense of
07:21future companies break it down for me
07:24because all I know about taxes is I file
07:27how do taxes actually affect company
07:29creation you know if you're a start-up
07:31right what's the most critical resource
07:32you have it's basically your cash right
07:34and you know every conversation of
07:35course we have with our companies is how
07:37do you get to the next milestone
07:38understand the fact that you've got
07:39limited amount of cash so one of the
07:41things we could do from a capital
07:42formation perspective is you know think
07:44about things like R&D tax credits for
07:46example so for example in Canada today
07:49many companies when they hire engineers
07:51they're able to deduct a lot of the
07:53expenses associate with those engineers
07:54from their taxes sort of like a credit
07:57for investing in the law that's exactly
07:58right yeah I'm sure there's kind of
08:00other ideas but you know that's that's
08:02at least once it's a great example that
08:04and you know well limitations there
08:07there are a lot of very technical rules
08:10in the tax code as I said that we're
08:13really developed and thought about when
08:15they're thinking about some big company
08:18that's already turned a profit how can
08:20we make it equally important for those
08:24startups to benefit these potential
08:27benefits don't necessarily only apply to
08:29venture-backed startups it would apply
08:31to any small and medium-sized business a
08:33mom-and-pop business a family-owned
08:35business a three-person business and it
08:38would blood any basically non large for
08:40a profit entity that's right Bobby
08:41mentioned this word in a well and just
08:43to break it down I know l stands for
08:44this concept of net operating loss years
08:47ago there was an effort in Washington to
08:51limit what those losses
08:54out they could be carried forward to an
08:56acquiring company or changing control
08:59which could be in our case a new
09:01financing ground but the purpose of that
09:04was really to get it a lot of
09:07established companies buying what you
09:10might want to refer to as a zombie
09:11company and they were simply doing it to
09:14lower their taxes so there were all
09:16these net operating losses on the books
09:18and so another company would come in and
09:20it was purely for a tax benefit and so
09:24Congress and others went in and said
09:26okay we're gonna limit how much you
09:28could do it so they put all these tests
09:30and rules in there and and once again
09:32it's thinking about established
09:34companies and what happens and the
09:37unintended consequence of that was to
09:40make it more difficult for start-up
09:43companies who are doing all the things
09:47that we would want them to do right
09:49hiring all this stuff and so for them to
09:52take this you know haircuts so to speak
09:54when they are being acquired just
09:57doesn't make sense it does in the in the
09:59context by which those rules were passed
10:01but it's an unintended consequence on
10:04the entrepreneurial ecosystem so my
10:06understanding is that there's not a
10:07one-size-fits-all that I mean yes there
10:09might be some good reasons for not
10:10having large companies do sort of the
10:11shake-and-bake with their P&L but for
10:14small companies you might want to think
10:16about this case where by the way you do
10:19want to incent cuz it really boils down
10:21to incentives at the end of the day
10:22that's exactly what we're saying is look
10:24let's start from the premise that as a
10:26general matter it's a good idea for you
10:28know competitiveness for the US economy
10:29for us to be investing in R&D and trying
10:31to build new technologies and that
10:33creates jobs and that's what creates
10:34obviously broader quality and everything
10:36else in the world and so what are the
10:38things that government can do - number
10:40one hopefully at least not dissing sent
10:42to that activity and then to actually
10:43encourage activity which we all agree is
10:45actually net positive believe it or not
10:47actually tax policy can incent behavior
10:49another really interesting area that we
10:51should talk about is kind of this
10:52concept of capital formation and capital
10:55markets right and to give you know
10:57everybody a broader context we got two
10:58things going on in the US one is the
11:00number of publicly listed companies
11:02continues to fall it and you know if you
11:04look at the numbers kind of over the
11:05last 20 years the number of companies in
11:08gets closer to 3,500 to 4,000 today
11:10versus 7,500 8,000 about 20 years ago we
11:13probably shouldn't debate how we got
11:15here we have a ton of we put out a big
11:17deck that analyzed already comments a
11:20bit on that companies are not going
11:22public either at the you know size and
11:24scale that they used to which is many
11:26companies used to go public at an
11:27earlier stage in their lifecycle and we
11:29have a smaller number of companies and
11:30by the way why does that matter beyond
11:32like investors getting their money out
11:34companies do die they do fail and so we
11:37have to think about how are we creating
11:40more companies and part of creating more
11:42companies is having an opportunity for
11:45those companies to graduate and go do
11:47something else right or get bigger like
11:50the JOBS Act a couple of years ago what
11:53what could the next Jobs Act look like
11:54since you brought up the the J word when
11:57companies are public they generate jobs
11:59at a much faster pace than when they
12:00stay private because that's a public
12:01company you've got access to a very very
12:03broad base of money out there to fueling
12:05I say that the difference between M&A in
12:07an IPO is that like a broader swath of
12:10the American public gets to participate
12:11in that communal like you get to invest
12:14in a Google whereas before you would
12:16have no access to that potential growth
12:18which is amazing that's certainly true
12:19if you look at the numbers right you
12:20know I think it's like 95 96 percent of
12:23people in the u.s. the only access they
12:25have to capital appreciation is through
12:27the public markets again so if all of
12:28this growth you know is accruing to you
12:31know the benefit of quite frankly you
12:33know largely wealthy institutions who
12:34can afford to invest in venture capital
12:36as an asset then you're right you kind
12:38of leave out a very very broad
12:39cross-section of people to be able to
12:40benefit from hopefully what is
12:41appreciation in their 401 K accounts and
12:44other retirement can yeah things that
12:45sort you know another interesting thing
12:47about the JOBS Act was around
12:49crowdfunding yeah how do we get more
12:51people to be able to participate in
12:52fundraising and access to some of these
12:55private market opportunities not just be
12:57seized not just be seized right so
12:59individuals who may have excess cash
13:01that they think you know there's a great
13:02investment opportunity this market and
13:03so you can also pull people together
13:04into syndicates I mean which is what
13:06happens on Angeles that's exactly right
13:07there's the idea behind the new
13:09crowdfunding rules that are coming out
13:10in in the JOBS Act is number one is
13:14allowing people who are what we call
13:15unaccredited investors basically right a
13:17credit investor really just basically
13:18means you're rich is a simple way to
13:21pass some kind of special tests the
13:25simple thing is hey you're rich enough
13:26that if you lose this money you know
13:28you're gonna surrender right but and so
13:31the idea one of the ideas behind the
13:33crowdfunding rules is to allow people
13:35who you know may not yet be at that
13:37state of you know financial success but
13:38to be able to say hey look I'm you know
13:40gonna try and you know figure this stuff
13:42out and in limits so there are
13:43constraints on how much money you can
13:45invest if you're not a credit which is
13:46probably a smart thing to do that is a
13:48really interesting kind of opportunity
13:49actually because it's a sort of
13:51democratizing venture capital and new
13:53company formation in a way yeah and I
13:55understand that there are concerns as
13:57well it's a new thing so there's gonna
13:58be a lot that needs to still happen yeah
14:00but it's an interesting this is a really
14:02risky asset class right so we want to be
14:04careful that we don't have people losing
14:06money that they actually really truly
14:07need and then there are some other
14:08regulatory things which are still
14:10working their way through it yeah it's a
14:11really interesting Testament just the
14:13formation of law and regulation in
14:15general is ever-evolving as things you
14:17know unintended consequences as Bobby
14:19talked about intended consequences
14:21finding things out kind of figuring
14:23things out as you go it's a super
14:24fascinating process back to the JOBS Act
14:26though cuz I we hear a lot about it I'd
14:28left you to actually break down like
14:29what is that JOBS Act the high-level why
14:32it matters we hear so much about it the
14:34simple way to think about the JOBS Act
14:35and there were lots of people who were
14:37involved in that is think about it as
14:40kind of how do we improve the on-ramp to
14:42getting onto the freeway with that is
14:43the IPO there's a lot of things you have
14:45to do right you have to do all kinds of
14:46filings and one of the things the JOBS
14:48Act did was kind of modified the
14:50regulatory requirements around those
14:51filings to kind of right size it for
14:53what is appropriate for an earlier stage
14:54company instead of what might be
14:56appropriate for example for a GM or a
14:58Goldman Sachs or a Ford right company to
15:00do this so the other thing that Jobs Act
15:02did and we see this today for those of
15:03you who follow this is this concept of
15:05confidential filings that companies can
15:07do so in the old days companies when
15:08they were going to go public they would
15:10file with the SEC and then while they
15:12were waiting for the SEC to kind of
15:13greenlight them to go do their process
15:14their filing was out there in the public
15:16domain and so lots of their competitors
15:19would kind of take potshots at him but
15:20the company were in what was called a
15:22quiet period which is the so you've kind
15:25of like you know fighting with one hand
15:26tied behind your back okay and what the
15:28confidential filing does is allow people
15:29to kind of start that process at the SEC
15:31reviewing the documents but doing it a
15:33confidential way so that
15:35companies kind of you know don't feel
15:36like their business gets impacted while
15:38they're kind of waiting for that the
15:39other big piece I think the JOBS Act did
15:41was allow kind of more conversations
15:43with the research and the institutional
15:45community before you go public they call
15:47it testing the waters why wouldn't that
15:48you've been there before the SEC was
15:50very worried about this idea which is
15:52are you trying to kind of hype your IPO
15:54before it goes out and kind of you know
15:56tell people how wonderful you are but
15:58without the full benefit of all the
15:59documentation everything else that would
16:00allow them to make an informed decision
16:02right but what the SEC I believe rightly
16:04so said is hey look in a limited context
16:06it's okay for you to go talk to the
16:08research analysts at fidelity or at tier
16:10o price or others and get feedback from
16:12them on how you're thinking about the
16:13business and how they as public market
16:15investors might think about it so if you
16:16kind of put all that together now algae
16:18that works quite well which is you're
16:19going on to the freeway to the IPO how
16:21do we get rid of the potholes and make
16:23it a much smoother drive on that on-ramp
16:25the other thing that the JOBS Act did
16:27was it looked at well okay once you're
16:30on that public you you've gone the
16:34on-ramp you're on the highway how can we
16:37make it smoother to be successful on
16:39that highway and do not like crash into
16:42some other cars while you're driving
16:43exactly and one of the things that was
16:47called for in there and it's currently
16:48being done right now was let's do a
16:51pilot project and see if we went back to
16:53tick size trading meaning you know we
16:57went to decimalisation and so stocks are
17:00traded at pennies as opposed to the old
17:03way of that certain tick size is there
17:06anything else to improve the on-ramp I
17:08mean one very concrete example I'd come
17:10to mind for me is wasn't there a
17:11provision of the JOBS Act that you don't
17:14have to comply with sarbanes-oxley until
17:16a certain point because in the past tiny
17:20startups would literally not have the
17:21kind of regulatory apparatus in place to
17:24do all the paperwork and they're trying
17:26to like build their freaking business
17:27for God's sake and they don't even have
17:29like the kind of scope that you're
17:30talking about that sarbanes-oxley was
17:32intended to help regulate and but now
17:35they have like a little bit right of a
17:36little bit of runway to use your on-ramp
17:38analogy before they have to actually
17:41worry about Sox that's exactly right
17:43once you're on the freeway what's it
17:44like to be a public company and you're
17:45right one of the areas that they did was
17:47to kind of again right-size the
17:49acquirements you know as a relates to
17:50sarbanes-oxley for what is appropriate
17:52for a company that's obviously smaller
17:54right which makes a lot of sense another
17:56another recurring theme besides the
17:57incentives so far is this idea that
17:59there's no one-size-fits-all that's
18:01really depends on company size to a
18:02great extent which is really the
18:03difference between a start-up in a big
18:05company then in the day but then the
18:06next phase okay great what else can we
18:09do to make that experience of being
18:10public you know more again size
18:12appropriate and regulatory perlier the
18:14things that people think about here yes
18:16should they have like three quarters I
18:19mean what are some of the ideas I'm just
18:21thinking out loud yeah well so so big
18:22picture number one and Bobbie mentioned
18:24this concept of this tick size pilot I
18:26actually didn't quite get the
18:27implications of the tick size pilot the
18:29big picture idea behind the tick size
18:30pilot was if you could improve what's
18:33called the trading liquidity for the
18:34stock right so kind of make these things
18:36you know more liquid in the sense that
18:39one of the reasons why institutions
18:41don't want to buy these stocks is
18:42because if the stocks trading at a
18:43dollar and I go in and buy a hundred
18:45shares I'm gonna probably drive the
18:46stock price up to $2 or $3 just because
18:49my small I think of Schrodinger's cat
18:51type of things right right and then when
18:52I try to sell on the other end right
18:54every time I try to sell I'm gonna drive
18:55the stock price down because it's not a
18:57very liquid market there's not a lot of
18:59transactions it's a disproportionate
19:01whereas look if you own Apple or Google
19:03stock we could trade a hundred thousand
19:05ten thousand shares you know it's not
19:06going to move the price very much
19:07because there's so much volume happening
19:09in those trades so the the big picture
19:11theory behind the tick size pilot was
19:13are there ways to kind of you know kind
19:15of constrain the pricing around how
19:17these things work and limit the
19:19increments at which people trade so that
19:21you kind of get a lot more volume at
19:23fixed price points and that helps
19:25alleviate some of this kind of a
19:26liquidity problem that you have another
19:28thing we talked about the on-ramp to the
19:31the public markets there there are a
19:33number of people that are trying to
19:35think about is there a better place by
19:37which these small cap companies could go
19:42and and be on an exchange that looks
19:44different than those exchanges where the
19:46largest companies are the idea is that
19:49the companies that would be listed on
19:51this exchange might have sort of a
19:54different set of rules for example it
19:56might be more long term in nature as we
19:59think about it as opposed to you know
20:00high-frequency trading or quarter
20:02quarter results or things like that and
20:04there might be benefits to which people
20:07that were trading on this type of
20:10exchange might be saying to those
20:14companies look we want you to think more
20:17long-term and not just about what your
20:20earnings are this year that year and and
20:23so people have given thought to what
20:24could an exchange look like particularly
20:26for tech companies look these are
20:27product companies right because their
20:28products on those they have things
20:29called product cycles and you know
20:31revenues go up in those cycles but then
20:33there's times where you have to invest
20:34you know more Rd to kind of get to that
20:35next product cycle and as a public
20:37company it can be challenging sometimes
20:39because by definition those investments
20:41are diluted to your earnings in the
20:43short term with the hope of course that
20:44you know they create long product cycles
20:46that are very positive from earnings and
20:48so these kind of exchanges that might
20:50better orient and take into account the
20:52fact that we're trying to accomplish a
20:54long term goal and how do we affect
20:55trading and other stuff you know there's
20:57a you know somebody who I'm sure many
20:58people have heard from Eric Ries you
21:00know who's you know a very famous for
21:01the Lean Startup activity he did in our
21:03podcast eric is working with a lot of
21:05folks in DC to think about this concept
21:07of he calls the long term stock exchange
21:09but again similar idea which is how do
21:11we incent both management teams and
21:13employees as well as incent shareholders
21:15to kind of think longer-term around
21:17these product cycles as opposed to the
21:19daily and you don't mean it by minutes
21:20so that all the benefits of being public
21:22and the discipline that comes with it
21:24optimized for the sort of long-term type
21:28of business or an early-stage company
21:30versus a much later mature company I
21:32think that's a really important point I
21:33just want to underscore that because you
21:35know a lot of people hear this stuff and
21:36they say hey look this is you know this
21:38is kind of a you know a way for people
21:39to kind of you know not have to follow
21:41the rules and stuff like that your point
21:43is exactly right which is we've said
21:44this publicly as it as a venture capital
21:46from a lot of times going public is a
21:48really important thing for companies to
21:49do and it's not just because you know it
21:50creates access to capital but it's a
21:52good discipline around how do you think
21:54about really running your company in a
21:56way that's responsive to a very broad
21:57cross-section of public investors and so
21:59everything that we're talking about here
22:00whether it's long term stock exchange or
22:02some of these other ideas this is not to
22:04say hey let's have a sloppy public
22:06market the idea is hey we can do this
22:07and we ought to have that discipline of
22:09being a public company but let's make
22:11sure that people understand the
22:12incentives and align the incentives
22:14around more long-term behaviors opposed
22:16it's great so maybe just to wrap things
22:19up if you're in this tech ecosystem if
22:21you're a venture capitalist or you're an
22:22entrepreneur what do you actually do
22:23with all this information when you
22:24realize the the point that the first two
22:27years of a new administration is when
22:29most big things happen and so you think
22:32back over the last eight years of
22:34President Obama's term and now the next
22:36four years of president Trump's term
22:38these next two years will be the most
22:42active in a decade spanned because the
22:46second term usually isn't as as active
22:48as the first term and so this next
22:50two-year period is when big things will
22:53happen and it's rare that you have that
22:55two-year period with the total control
22:58of one political party in this case the
23:01Republicans so things are going to
23:02happen I think it's extremely important
23:06for entrepreneurs for investors for
23:08everyone to pay attention and make sure
23:11you're up to date on what's happening
23:13and make sure you're participating and
23:15what's happening but people want to be a
23:17part of those discussions you know they
23:19should definitely plug in at the same
23:20time certainly for all people out there
23:22who are doing the hard work of building
23:23businesses look the most important thing
23:25still is to go build your business and
23:27do what you have to do to where these
23:28things will happen one way another and
23:30you'll you'll react to them and you'll
23:31do the things you have to do to run your
23:32business but there's no substitute for
23:33actually building a successful business
23:35regardless of what the political
23:36landscape looks like well it sounds like
23:382017 to 2019 is going to shape up to be
23:41incredibly interesting the second season
23:43after 2016 the show let's see what
23:46happens next thank you for joining the a
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