California Regents Coddle Billionaires

Income inequality is one of the biggest issues in the country.

The University of California Regents recently joined that issue squarely on the side of the billionaires, and against everyone else — including taxpayers — in a case involving the degree of transparency which should be allowed into the university’s venture capital investments.

In a recent court case, Regents of the University of California v. Superior Court, the Regents coddled two of the richest venture capital funds, Sequoia Capital and Kleiner Perkins Caulfield & Byers, by spending taxpayer money to hide the individual fund performance of UC’s investments in those two well-connected and fabulously-rich firms.

In the insular world of the Regents, if a billionaire venture capitalist says “jump,” the Regents ask “how high”? The Regents count themselves lucky if they can give the venture capital firms tens of millions of taxpayer dollars.

If the name Kleiner Perkins sounds familiar, it should. The firm’s co-founder, Tom Perkins, who is worth an estimated $8 billion, recently made news by comparing those who wonder about income inequality to Nazis. Perkins said in a letter to the Wall Street Journal, “I would call attention to the parallels of fascist Nazi Germany to its war on its ‘one percent,’ namely its Jews, to the progressive war on the American one percent, namely the ‘rich.'”

It’s easy to see why Mr. Perkins feels persecuted, since he’s down to his last $8 billion. And it’s easy to see why the UC Regents would spend taxpayer money to help out the Kleiner Perkins firm, given the firm’s dire financial situation. Of course, Kleiner Perkins may need to hold on to some of its money since it’s now fighting a gender discrimination suit brought by a former partner, Ellen Pao.

The Sequoia Capital firm is no less self-absorbed and self-righteous than Mr. Perkins. In an August 2003 letter to then-UC Treasurer David Russ (who’s now gone to the private sector), Sequoia’s Michael Moritz told UC that a Public Records Act case against UC had “impelled us to end our relationship.” In other words, Moritz said, he wouldn’t take UC’s money any more. “We are utterly resolute in our belief that it is not in the interests of Sequoia Capital’s other clients that we be hounded, badgered and stalked by entities wishing to either profit from or publicize our private and confidential information.” Most people receicing tens of millions of dollars from the government would be happy, but Mr. Moritz felt “hounded, badgered and stalked” if anyone wanted to know how the investment of taxpayer money had performed.

Moritz and Sequoia got over their hurt feelings, however, when the Great Recession of 2008 dried up sources of venture capital. Sequoia solicitied UC to invest in several funds in 2009, and UC responded by — you guessed it — giving more millions of dollars to Sequoia. But it won’t tell taxpayers how the latest Sequoia investments have performed.

The Regents say their investments in venture capital firms like Kleiner Perkins and Sequoia have been good for retirees and students. But without disclosing how individual venture capital funds have performed, there’s no way to test the Regents’ assertions. That was the ruling of a superior court in 2003, and the California Legislature followed by requiring, in 2005, that certain information about venture capital investments must be disclosed. The Regents are now trying to circumvent that law by refusing to obtain from Kleiner Perkins and Sequoia fund performance information that those venture firms don’t want to disclose. (Other venture firms are, as of this writing, still disclosing fund-by-fund performance information.)
The Regents’ position is bad public policy and bad business. A comprehensive 2012 report by the Ewing Marion Kauffman Foundation — itself an investor or limited partner in many venture firms — showed that the average venture capital firm fails to return investor capital after fees. The Kauffman Foundation study blasted the “complete lack of oversight and accountability” exercised by limited partner investors like the California Regents, called for increasing transparency and requiring firms like Kleiner Perkins and Sequoia to have more “skin in the game,” and said, “Eliminating the black box of VC firm economics is required if limited partners seek to make prudent and aligned VC investments. Limited partners have historically failed to secure even miminal information rights on issues that foster transparency and are material to aligning limited partner and general partner interests.”

California’s Regents would do well to heed those words, to insist on a modicum of transparency, and to stop spending taxpayer money defending the hurt feelings and protecting the egos of billionaires. Asking for transparency, and questioning whether venture capitalists are getting special treatment, isn’t Nazism. It’s democracy.