Cover Story: The Shape of Things to Come? –

Pick your metaphor: venture capital as the Wild West of finance, the final frontier, the last great tree house for adults. One thing is clear: The glow of memories of how the venture capital industry was in the beginning is fading. Structure, civilization, order, transparency, uniformity, regulation-whatever word you choose-is surely coming to this industry. The only question is when.

Every era has such transitional moments. Financiers of the 18th century no doubt sat around their hearths remembering the 300% investment return for the Dutch West Indies Co. (founded in 1621 to exploit trade between Europe, West Africa, the West Indies, and North America), and the times when they controlled armies and entire continents. Capitalists of the 19th century regaled one another with memories of how Leland Stanford, one of the venture capitalists who built the Central Pacific Railroad, once stood in a buggy throwing handfuls of silver dollars to voters in a gubernatorial election. Bankers of the 20th century could recall Junius Pierpont Morgan’s almost single-handed rescue of the American financial system, standing for days behind his desk at his firm’s 23 Wall Street offices giving orders, while government officials in Washington were helpless. And the “great generation” of venture capitalists, now living in the 21st century, the men who helped to create America’s technology industry, can remember quite vividly when venture capital was the last great, unregulated financial marketplace of the world. “VC used to be such a fun business. To create something out of nothing and watch it grow,” says Reid Dennis, founder of Institutional Venture Partners (IVP).

For a while it appeared that venture capital would escape the repercussions of the general mayhem of fraud, stock manipulation, insider trading, and felonious accounting practices affecting the heart of the American financial system. Sure, VCs would feel the pain of a lack of exit opportunities in the public markets and from a downturn in M&A, but limited partners have to invest their money somewhere, and the venture industry remains the last-best place to earn more than single digit returns. The venture industry is happy to be under the radar of regulators.

But there are those within the industry who believe that if they don’t take action on their own, regulators will come knocking on their door at some point. Mind you, they’re not making pronouncements at conferences. Most of them ask not to be quoted on the topic. Why the sensitivity? To put the matter in perspective, you have to keep in mind that the venture capital industry is made up of remarkable individuals, most of whom are likely to agree about only one aspect of their industry: that each firm is unique in the way it conducts its usiness. The constant refrain is that applying standards to venture capital assumes that all firms are the same, a bunch of gingerbread men. But taking a cookie-cutter approach to the industry won’t work, because it is heterogeneous. No gingerbread men around here!

It is only after lengthy one-on-one discussions with industry veterans that it becomes clear that most venture capitalists are torn between the need for standards and the fear of what may happen if and when such standards are published-especially in today’s punitive regulatory and judicial environment. “There is a real threat of intervention [by regulators] if the industry doesn’t [regulate itself],” says Michael Mills, a senior executive at 3i Group.

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