I was sitting around last night reading the Congressional Record because, well hey, it's so much fun to do, and I came across a description of what venture capitalists actually do that had been presented before the House Ways and Means Committee just this week...

Ways and Means is holding Congressional hearings on how to simplify America's tax code and one legislative suggestion under review would impact the venture capital industry. The proposal is to tax carried interest as normal personal income instead of capital gains. Tax could double the amount of taxes many fund managers and investors in the venture capital and private equity industries pay.

Jonathan Silver of Core Capital Partners, testified Thursday before the Congressional committee. As part of that testimony, Silver described what it is that, in his view, venture capitalists actually do.

Perhaps it would be useful to spend just a moment explaining what venture capitalists actually do and how the venture business works. I believe it will become clear that we work in many important ways exactly like the founders and entrepreneurs we back and quite differently from financial managers in other asset classes.

Venture funds raise capital from institutional investors like pension funds, endowments, and foundations and to a lesser extent from individual investors. Our charge is to invest these funds in the most promising start-ups, with the understanding that we will work with these companies until they can go public, be acquired by a larger entity or, as is sometimes necessary, shut down.

Perhaps it would be useful to spend just a moment explaining what venture capitalists actually do and how the venture business works. I believe it will become clear that we work in many important ways exactly like the founders and entrepreneurs we back and quite differently from financial managers in other asset classes.

Venture funds raise capital from institutional investors like pension funds, endowments, and foundations and to a lesser extent from individual investors. Our charge is to invest these funds in the most promising start-ups, with the understanding that we will work with these companies until they can go public, be acquired by a larger entity or, as is sometimes necessary, shut down.

These start-ups almost all begin the same way, with an entrepreneur and a VC agreeing on an idea. There is no strategic plan, or, at least, not much of one. There is no senior management team; there are no customers. There is just our collective belief that the initial idea can potentially be turned into a viable and profitable business.

When we launch a company, we are investing both time and money, just like the entrepreneur. We generally invest a small amount at first and we expect to continue to finance the company as it grows. We often require the company to meet business-related milestones in order to receive additional rounds of financing. For an early-stage company, five or six rounds of financing is not unusual. Our investment in each company typically lasts 7-10 years, often more and rarely less. We see no cash returns until the company goes public or is acquired. Even at that point in the life cycle, venture capitalists are not paid from company dollars but by outside parties establishing a fair market value.

We also invest our time and lots of it. We take a seat on the board and work with the management team, often on a daily basis, developing strategy, introducing the company to customers and suppliers, identifying and hiring key managers, and leveraging our past experience to address competitive and operating issues.

Let me give you a sense of scale. At Core, over the life of a fund, we expect to make somewhere between 20-25 investments. We have five partners. A fund's initial investment period usually lasts about five years. So, our partners make 1-2 investments a year per partner. We do not have hundreds of positions in the portfolio and we couldn't, because we don't invest in stocks, we start companies.

We are often as actively involved as the founder. Very frequently, the initial idea for a company is developed by a professor or a research scientist who does not want to leave his or her current position. They may be involved a day or two a week, lending technical guidance to the new company. We get involved in building out the company. The combination of their technical knowledge and our business knowledge is equally responsible for the company's success. If we co-founded the company, work equally hard, make intellectual contributions of equal value, why should the founder's share on the sale of the company be treated as a capital gain and ours viewed as performance for service and ordinary income?

I believe it is important to understand that venture capitalists and entrepreneurs are really co-founders, we are not just financiers. Without our active, ongoing involvement, many of these companies fail, or fail to launch, and potentially important innovations remain in the garage, incubator or lab. For their contribution, entrepreneurs receive founders stock, which, if sold, is taxed at the capital gains rate. Venture capitalists, for our contribution, receive carried interest, which is also taxed at the capital gains rate, but only to the extent attributable to the value created by the sales of our companies. This arrangement creates an equilibrium of incentives for all the key players.

Silver is a member of the National Venture Capital Association.