Venture Capital Pillars Are On Weak Ground
Bill Warner Thursday, April 30, 2009
At its recent annual meeting, the National Venture Capital Association (NVCA) introduced the four pillars of success for reinvigorating the venture capital markets. The trouble with many of their ideas is that they are built on assumptions that the government law makers, regulators and administration are going to make massive changes in order to save the small cap venture investing market. Given the current government posture, these changes in the near term are terribly unlikely.
Boutique investment bankers
The idea of finding new partnerships with the smaller investment banking firms is a step in the right direction. However, these firms are still going to have to make money at this. Their deals are going to have to be attractive enough while investing in companies whose post-IPO value is between $100M and $400M, the segment of the market below the “Big 4” investment banks.
This seems like a long stretch in that none of the problems that this segment faces are being solved. The burdensome regulations are still there. The tax implications are still not favorable. This pillar of success seems more like a possible outcome when the basic capital market infrastructure changes are made.
New paths to liquidity
Having new and faster paths to liquidity certainly could make a big difference. The NVCA presentation doesn’t explain how this is actually going to happen in a way that works for investors and sellers. However, this does seem like a necessary element for stream lining the investment process for boutique investment banks. But, without fundamental governmental changes, this too will run into a brick wall.
Taxation changes – not for quite awhile
In the face of a socialist administration, coupled with a far left wing dominated congress, the likelihood of getting any changes that would provide tax incentives for businesses, let alone helping those capitalistic venture capital firms and investment banks, is not in the cards. With an administration and congress that is fundamentally anti-business, the only think we have to look ahead to for awhile are tax increases.
Reduced regulation – not likely
For the same reasons we won’t see tax incentives, we will only see more stifling regulation on businesses and increased government oversight in the private sector. Sarbanes Oxley is not going to change anytime soon and volatile markets are playing into the liberal’s hands in that it gives them a reason to get more involved in the private sector. None of them is looking to really help Wall Street.
Stay with the basics
It’s not the end of the world if IPO’s remain stagnant. The goal here is not to save venture capital. It’s to save small business. Whatever we can do as business owners and financial institutions to work with the hand we are dealt is all we can expect right now. Mergers and acquisitions will continue to be the primary form of exit. Investors are going to have to accept that limitation and structure their deals accordingly. We can expect no meaningful help from the administration or congress for the foreseeable future. Most of these people don’t really understand what they have done to small business anyway.
For entrepreneurs, build high valued businesses by executing well. Be experts at the basics of growing high growth and profitable businesses. For investment institutions, build your portfolio based on smaller valuations and oriented to faster exits, without relying on IPO’s to save the day.
Filed Under: Angel Investment, Financing a Company, Business Strategy and Planning
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
