Bill Gurleys experience with venture capital in Silicon Valley

From: allin

Bill Gurley arrived in Silicon Valley in 1997 and became a venture capitalist in 1998 [00:00:00]. Early in his career, he had “zero interest” in interacting with any form of government, believing it unnecessary for his work with founders, software, and technology [00:00:11].

Unforeseen Government Interaction

Gurley’s perspective changed when he encountered an issue that required him to understand what was happening in Washington D.C. [00:00:23]. Advisors introduced him to a D.C. lawyer, who arranged a meeting with a congressman [00:00:33]. The congressman, instead of Gurley traveling to D.C., was coming to Silicon Valley [00:00:54]. However, there was a catch: attendees needed to bring $5,000 each [00:01:07].

Gurley initially gathered six people, totaling $30,000,butwasinformedmostsuchmeetingshave10to12people<aclass="yt-timestamp"data-t="00:01:23">[00:01:23]</a>.Thisexpandedtherequirementto$60,000 [00:01:33]. Subsequently, the lawyer asked if attendees had spouses, suggesting they too write $5,000 checks, even if they didn’t attend [00:01:43]. Gurley recounts this as a “True Story” that happened two more times before he stopped meeting with congressmen [00:01:59].

The Catalyst: Tropos Networks

The specific issue that prompted Gurley’s initial engagement with government concerned his fourth VC investment in Tropos Networks [00:02:15]. Tropos developed industrial-grade mesh Wi-Fi that could “bathe a city in Wi-Fi Broadband” [00:02:20]. Mayors across the country were enthusiastic about providing free Wi-Fi for public safety, economic development, and addressing the digital divide [00:02:37].

The plan, particularly in Philadelphia under Mayor John Street and CIO Diana Neff, collided with “commercial interest” [00:03:00]. Lobbyists, not citizens, were trying to kill the Philly Wireless plan [00:03:21]. Gurley was surprised to find that companies like Verizon and Comcast were actively drafting and pushing legislation through state legislatures [00:04:11]. David Cohen, Chief Lobbyist for Comcast, was identified as the key adversary, referred to as “Philadelphia’s most powerful unelected official” [00:05:05]. Gurley felt his efforts against such established power were like “a second grader challenging Michael Jordan” [00:05:58]. Within two years, AT&T and other incumbents successfully outlawed municipal broadband in over 22 states [00:06:16].

The Theory of Regulatory Capture

Gurley introduces George Stigler, the 1982 Nobel Prize winner in economics and “the father of regulatory capture” [00:08:31]. Stigler’s most famous quote states:

“As a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit.” [00:08:42]

Gurley rephrases this as “regulation is the friend of the incumbent” [00:08:50].

Key points of regulatory capture 101, derived from Stigler’s notes, include:

• A special interest is prioritized over the general interest of the public, leading to a net loss for society [00:09:27].
• Mechanisms often include limited market entry and price protection/increases [00:09:43].
• Mechanisms of influence involve money (made worse by Citizens United), exposure (time around people), and revolving doors (people moving between industry and government) [00:09:51].

Research from Morgan Stanley in 1999 concluded that “landmark regulatory action has a tendency to improve returns for the largest players in the targeting industry” [00:10:16]. Attempts to increase competition or improve customer experience often fail [00:10:48].

Case Studies in Regulatory Capture

Gurley provides several examples to illustrate regulatory capture:

1. Telecommunications Act of 1996

This act was heralded as a major reform, with two goals: to promote competition and to encourage rapid development of new technologies [00:06:59]. However, Gurley shows that:

• In 1996, the top four telecom companies controlled 48% of the market; years later, after the legislation, they controlled 85% [00:07:18]. This indicates a failure to promote competition [00:07:28].
• VC dollars invested in telecom equipment, which used to be 15% of all VC activity, fell below 1% within 10 years, leading to the industry becoming largely defunct [00:07:34]. This shows a failure to encourage innovation [00:08:02].

2. Electronic Health Records (EHR) Software and Epic Systems

Epic Systems, a large private company, is the dominant player in medical/EHR software [00:11:11]. Its CEO, Judith Faulkner, was the only corporate representative on Obama’s Health IT Council and a major donor [00:11:28].

• The HITECH Act, tucked within the American Recovery Act, created incentives for doctors [00:11:51]. Doctors could receive $44,000eachiftheyboughtsoftware,totaling$38 billion [00:12:14].
• A second phase paid doctors an additional $17,000 to prove “meaningful use” of the software [00:13:12].
• The Office of the National Coordinator for Health Information Technology (ONC) defined the necessary software features, which Gurley speculates mirrored Epic’s [00:13:30]. The Department of Justice then enforced this, leading to massive fines ($155M,$57M, $145M) against Epic’s “lesser competitors” [00:13:50]. This effectively created a “brick wall” against smaller, innovative startups that typically disrupt with simpler, targeted products [00:14:09].

3. COVID-19 Rapid Antigen Tests

Gurley highlights a stark contrast in the market for rapid antigen tests:

• The core technology, lateral flow assay, was developed 80 years ago and is a commodity [00:15:15].
• In Germany, 96 out of 122 vendors were validated, allowing five tests to be purchased for 75 Euro cents each [00:15:39]. The UK also distributed tests cheaply [00:16:07].
• In the U.S., the FDA initially fought antigen tests, and only three vendors (Abbott, Quidel, OraSure) were listed as available [00:16:14].
• Timothy Stenzel, who ran the FDA group approving antigen tests, previously worked for Abbott for four years [00:16:51].
• When President Biden authorized $2 billion to purchase tests, they were primarily bought from these select companies [00:17:33].
• The U.S. market still shows tests at $23.99forseventests,whileintheUKtheyare$1.50-$1.60 today, a 6x differential [00:18:53]. This lack of competition resulted in higher prices and potentially hindered public health [00:19:03].

Silicon Valley and the Looming Threat of Regulation

Gurley notes that Washington has its eyes on Silicon Valley from both sides of the political spectrum (e.g., Lindsey Graham and Elizabeth Warren, Marjorie Taylor Greene and AOC agreeing on breaking up big tech) [00:19:34]. He posits that politicians want tech companies “in the system” like military, finance, and telecom, because “there’s money” [00:20:00]. Large tech companies are already significant political contributors (e.g., Alphabet, Apple, Microsoft, Amazon to Elizabeth Warren) [00:20:14].

He points out that some Silicon Valley peers, like Brian Armstrong (Coinbase), Mark Zuckerberg, and Sam Altman, seem to welcome regulation, which Gurley interprets as an embrace of Stigler’s theory [00:20:26]. He finds it “scary” that incumbents in the AI space are spreading negative messages about open source, potentially because they see it as their biggest threat [00:21:15]. Concerns are raised that regulating AI, as proposed by Sam Altman, could turn software into the next “Big Pharma or military industrial complex,” stifling startup funding and innovation [00:28:38].

Conclusions and Potential Solutions

Gurley offers three main takeaways:

1. Ineffectiveness of Regulation: He believes current regulation is often a failure and a “net loss for society” [00:21:43]. He references Senator Patrick Moynihan’s belief that Congress should adhere to a “first do no harm” principle, citing the unintended consequences of mental health institution closures in 1963 [00:22:02].
2. Regulatory Capture Harms Capitalism: Gurley states that regulatory capture “gives capitalism a bad name” [00:22:40]. While competitive products from Silicon Valley see price drops, heavily regulated sectors like healthcare and education experience price increases [00:22:56].
3. Regulation as a Blocker to Innovation: Drawing on Matt Ridley’s work, Gurley emphasizes that technology, commerce, and the sharing of ideas lead to prosperity [00:23:10]. He fears that regulation acts as a “blocker to innovation,” thereby killing prosperity [00:23:29].

Gurley suggests that Silicon Valley’s success is partly due to its distance from Washington D.C. [00:23:56].

Regarding solutions to regulatory capture, he proposes:

• Massive Transparency: Mandating transparency like that of Open Secrets, where campaign contributions are immediately known and exposed [00:25:39].
• Addressing the “Revolving Door”: The movement of individuals between government positions and industry, where they gain significant wealth, is a “massive problem” [00:26:27].
• Overturning Citizens United: Gurley believes this is necessary but challenging as it requires a vote from those who benefit from it [00:26:49].

Gurley notes that the financial threshold to influence legislation is “shockingly” low, allowing relatively small amounts of money to impact laws worth hundreds of billions [00:30:45]. He fears that if the U.S. federal government, now the largest consumer and distributor of capital, continues this path, it could lead to the “decline” of democracy and capitalism [00:30:09].