Growth5 Blog

Friday, May 15, 2009

The National Venture Capital Association Has a Plan to Restore Liquidity

National Venture Capital Association (NVCA) outgoing Chairman Dixon Doll has been gathering research on the capital market crisis and has come up with a 4-part plan to fix it. Here is a portion of the NVCA press release about the initiative:

During the last decade, the number of initial public offerings (IPOs) by venture-backed companies has declined to alarmingly low levels, culminating in the 2008 drought when only six companies entered the public markets. Given the proven contribution of venture-backed companies to America’s economic growth, the NVCA sought analysis and recommendations from leaders throughout the capital markets ecosystem over the last several months. The resulting set of proposals looks to the venture capital industry, investment banking, accounting professions, law firms, stock exchanges and the government to enact measures to restore a vibrant IPO environment once the overall economy stabilizes.

I have embedded the NVCA's presentation at the bottom of this post. If you don't have time to flip through it, here are some highlights:
1. VC-back companies create jobs faster than non-vc backed companies. 1.54% to .48%.

2. 92% of job growth in vc-backed companies occurs post-IPO.

3. From 1992 - 2000 there were 1,776 IPOs. From 2001 - 2008 there were 392 IPOs. See #2 above.

4. NVCA's 4-Pillar plan to restore liquidity:
a) Ecosystem Partners: More entities willing to take small to mid-size companies public.

b) Enhanced Liquidity Paths: develop pre-IPO private market platforms

c) Tax Incentives: incentives like lower capital gains to stimulate IPOs

d) Regulation: keep regulation effective, easier - Sarbanes Oxley expensive for small companies
Out of these four, I believe the idea of Enhanced Liquidity Paths has the best chance of working. Secondary markets currently exist, but they need to be improved. If IPOs are not going to be there, this secondary market could serve as a great alternative for smaller vc-backed firms that wouldn't get the necessary attention trying to go the "traditional" IPO route in a decent economic environment, never mind the current one.

Enhanced Liquidity Paths would also create liquidity for larger private firms. For example, I hear you can get Facebook stock via the secondary market at a price that values them at about $4-5 billion. Could be a bargain compared to their future IPO.

Details on the 4-Pillar plan in the presentation below.

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