A Plan for Saving Capital Markets
The National Venture Capital Association (NVCA) has recently released its recommendations to restore liquidity in the American VC industry and create a vibrant IPO environment once the overall economy stabilizes. The NVCA’s recommendations rest on four pillars: ecosystem partners, enhanced liquidity paths, tax incentives, and regulatory review.
With regards to the first pillar, the NVCA calls for the return of small investment banks and accounting firms. The plan envisions big banks and accounting firms partnering with smaller ones. This type of partnership helped small tech companies go public until the dot-com bubble.
The second pillar, enhanced liquidity paths, calls for new forms of exits, such as exchanges where start-ups can sell shares on the private market. This would help overturn the falling number of IPOs (Initial Public Offering) and M&A transactions (there were only 6 IPO’s and 341 M&A transactions in 2008, and it now takes on average 9.6 years to get VC-backed companies public or 6.5 years for an M&A transaction).
The third pillar seeks is tax benefits, such as a more competitive capital gains tax rate and tax incentives for clean tech companies. Finally, the NVCA wants regulations (e.g., Sarbanes-Oxley and financial statement requirements) to be less of a burden for smaller companies trying to reach an IPO.
These recommendations, released on April 29, 2009, have already generated serious opposition, as well as commendation. For an example of the surrounding discussions on the NVCA’s recommendations see Harold Bradley’s analysis and related readers’ comments in the Kansas City Star. Bradley, the Kauffman Foundation's Chief Investment Officer and former American Century's Chief Investment Officer of U.S. Growth Equity-Mid Cap/Small Cap/Sector, argues that the VC industry has not always been the hero of capital markets and economic growth. He points out the harm that the industry has done in the past for the innovative economy.
This kind of discussion on saving capital markets is key to addressing the financing crisis for companies in the United States. There is no doubt that we need to get the VC ecosystem back on track (see our post on new data about the crisis’ impact on VC investments). The question now is whether the government wants to reshape the industry or merely restore it.
To access the full NVCA report, click here. For another set of recommendations, check out Harvard’s Josh Lerner diagnosis of the VC problem in the U.S.