Don't squash innovation

We've been sounding a note of optimism recently, to remind investors that although government intrusion into business produces negative results, we still believe that the best investment plan is to search for ways to match investment capital with innovative and well-run businesses.

However, as we have said many times before, government actions do have an impact on the risk vs. reward decisions investors make when considering an investment (see for example the discussion in this post from over two years ago, particularly the eighth paragraph in that post which discusses a venture capital investor as an example).

Two weeks ago, Senator Christopher Dodd of Connecticut unveiled a bill entitled the "Restoring American Financial Stability Act of 2010."

While the purpose of the bill is heralded by proponents as "ending 'too big to fail'" and "ending bailouts," thoughtful observers point out that the bill contains language which would change the laws regarding individuals and investment funds that invest in entrepreneurial start-up companies. For details, see the excellent discussion by Scott Edward Walker in Venture Beat's "Ask the Attorney" column, entitled "Will Senator Dodd's new bill destroy angel investing?"

We have previously noted the importance of angel and venture investing, and have recommended that investors might benefit by thinking more like an angel/venture investor whenever they invest capital in any company, whether it is a start-up or a major public firm (see for example this post).

Interfering with the ability to match capital with innovation at this most critical and vulnerable stage in the economic recovery is a grave error, and one that would throw salt over the fertile fields of entrepreneurial innovation that have given rise to so many innovative American companies.

Of course, cutting off capital from those who are trying to create companies that can do things better, cheaper, or both better and cheaper than existing companies will help existing companies survive longer and make more money, but in the long run this aid to the incumbents will come at enormous cost.

Lawmakers should understand that these kinds of measures are very harmful to those they represent -- and that they have a wider negative impact on the rest of the world, which depends heavily on American innovation in many industries, from software engineering to medicine.

Hat tip to Steve Waite and Kris Tuttle of Research 2.0 for pointing out this problematic legislative development to us.

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