Following the financial crisis there’s obviously a lot of interest in more carefully regulating aspects of the private equity markets, given that behind-the-scenes financial efforts have been seen (rightly or wrongly) as part of the cause of the mess. But, of course, Congress can barely understand what caused the problem, let alone other aspects of the the financial system, so they end up regulating by shooting in the dark. The latest is that the various attempts to put regulations on hedge funds and private equity firms that invest in public companies (which in many cases really were sneaky ways to get around regulations) may be applied to venture capitalists as well, despite the fact that venture capital is a totally different beast. It doesn’t invest in public companies. It doesn’t aim for sneaky quick flips. It’s true long term investment capital, directly investing in private startup companies to help them grow. It’s real investment — not gambling. But Congress doesn’t seem to realize that.

In a recent Congressional hearing where venture capitalist Trevor Loy explained this to our elected officials, Senator Jim Bunning of Kentucky apparently told Loy that he didn’t believe him that VCs invest in private companies rather than companies likely to be rated by the various ratings agencies (I’d link to the story where this was noted, but the publication that wrote it, put it behind a paywall and apparently doesn’t want traffic — there’s a Google cache for now). And, yet, these are the folks writing the regulations. This is why some of us get nervous about gov’t regulations. Yes, in an ideal world, perfectly knowledgeable regulators might possibly be able to divinely create regulations that work. But that’s not what we have.

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