Zaarly co-founder Eric Koester, the Seattle startup attorney-turned-entrepreneur, testified in front of the House Committee on Oversight and Government Reform on Tuesday. Despite Chairman Darrell Issa botching Zaarly’s name, Koester laid out four items which he believes needs to happen in order to help spark more entrepreneurial energy in the U.S. (Private Company Financing Regulations, Private Market Regulations, Exploring Alternative Funding Arrangements, and Immigration Reform).

“The most important lesson learned from entrepreneurs today is that removing friction — friction in business, friction in commerce, friction in human capital and — important to this committee today — regulatory friction is crucial for these businesses to do more with less,” said Koester.

Koester’s prepared remarks start in minute six of the video below, and he also answered a question about the importance of access to capital in minute 41. He said:

“It is the difference between a nice side business that supports your family, and a business that really contributes in a dramatic way to the U.S. economy. The business that we have started, Zaarly, is a business that that we hope will have a dramatic impact on markets, person-to-person commerce and hopefully have an impact on unemployment, but that’s only accessible to us because of the fact that we had forward-thinking investors to put capital in early and efficiently. That allowed us to run very quickly to the point where we took a business from an idea to, 12 weeks later, launching a very large-scale business.”

What followed from that was an interesting discussion about why investors and employees need to reach liquidity earlier in the company formation process, with Koester noting that a lack of liquidity in the IPO markets has a “downstream effect” on venture capital investing as well. The panel then debated the 500 shareholder cap, and why it should be lifted.

Former SEC commissioner Roel Campos also offered some general remarks on financial reform.

“Essentially, what we need today in my humble view, is a market that operates in a way that doesn’t mystify, worry, perplex investors,” said Campos, adding that the SEC has not kept up with the times and is now an “agency of lawyers.”

In minute 50, former investment banker and Tennessee congressman Jim Cooper noted that “financial literacy” has not increased over the years and that IPOs don’t always work out.

“Another problem is that many retail investors have the idea that all IPOs are automatically good. Many of them are disasters, many of them are a search for the dumbest dollars they can find in America, overly valuing a company and leaving the poor retail investor holding the bag perhaps who has been seduced by an overly optimistic analyst report.”

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  • Ronald S Woan

    How bad is the status quo? I am not sure that a little friction isn’t bad. The last tech bubble with all the creative ways of financing and exit strategies hurt a lot of folks both directly and indirectly.

  • Eric Koester

    @facebook-790394740:disqus Kauffman foundation has some fascinating data about Startups, early stage investing and overall job creation.  Their data shows that nearly all job creation in the U.S. is due to firms younger than five years.  What has happened in the past few years is that a higher percentage of those “young firms” aren’t hiring and aren’t growing — staying as small businesses rather than growing into larger public or sizable private businesses.  The impact is significant and is part of the reason unemployment numbers remain so high.  Without capital funding the early-stage entrepreneurs (from banks, VCs, angels, etc.) those businesses never grow in any material way and job creation never happens.
    So yes, it is easy to think about this from a tech perspective and think about the bubble of 2000.  Truth is, I’m less concerned about tech companies and more concerned about corner bakeries, small manufacturing facilities, and home-based businesses — your true small business.  Those are the ones that need capital and with banks still lagging in their lending and ‘friction’ on capitalization from friends, family or your community, we aren’t seeing job creation bounce back. 

    I think it is serious largely due to the fact that these are the driver of job creation and without capital to hire, expand and grow, we just won’t see an unemployment number drop below these current levels.

  • John Bailo

    If private investors want to risk their personal money on a business without reporting or legal requirements then they should be allowed to do so. 

    However, does this include fund managers?  The people who manage retirement funds, 401k Target funds, and so on.

    The key is allowing someone to take a risk with them knowing the risk…not to use people’s money and put it in jeopardy without them ever knowing the risk…or seeing the gains!

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