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Troubled VC sector wants aid to jumpstart IPOs
April 30, 2009 / 8:51 AM / 9 years ago

Troubled VC sector wants aid to jumpstart IPOs

BOSTON (Reuters) - Venture capitalists, facing the industry’s worst slump since the dotcom bubble burst, on Wednesday called for lower U.S. taxes and loosened listing rules to propel initial public offerings when the economy improves.

<p>IPO brochures of China Zhongwang Holdings Limited are displayed at a news conference in Hong Kong April 23, 2009. The initial public offering is the biggest test of investor appetite for new listings since last year's market meltdown. REUTERS/Bobby Yip (CHINA BUSINESS)</p>

The National Venture Capital Association, the country’s leading industry body, plans to lobby the government for lower taxes on capital gains. It will also urge the U.S. Securities and Exchange Commission to ease compliance requirements under Sarbanes-Oxley, to aid start-ups hoping to float shares.

Some investors at the NVCA’s annual gathering in Boston on Wednesday said they don’t see a full recovery in venture capital investment until 2010.

“I don’t think we’ll start seeing a true recovery until 2010,” said Tom Crotty of Battery Ventures.

Venture capital investment crashed nearly 50 percent to $3 billion in the first quarter from the 2008 fourth quarter, according to the NVCA, amid a nationwide liquidity crunch.

U.S. initial public offerings virtually vanished in the same period and now represent just 13 percent of “exits” -- where venture capitalists cash out of firms they invest in -- versus about 56 percent in the 1990s.

Since “the 2000s, the IPOs have fallen off the cliff here, and now represent something like 13 percent of the exits,” said Dixon Doll, outgoing chief executive of the NVCA.

He said venture capitalists have lost leverage with the corporations that buy out start-ups because they face no competition from IPOs. That has helped depress selling prices and hurt venture capitalists’ bottom line.

“This is a fantastic industry. We’re probably just not feeling so fantastic right now,” Kate Mitchell of Scale Venture Partners said at the NVCA conference. That is unlikely to change soon.

At the peak of the dotcom bubble, 225 start-ups on average went public each year.


Doll said IPOs, which are new and growing businesses, spur job creation. The alternative VC exit strategy of selling start-ups to existing corporations created far fewer jobs.

Doll wants to get back to the rates of start-up IPOs in the 1990s, when he said they averaged 150 yearly.

The industry is also wrestling with problems like the disappearance of boutique investment banks that once backed and underwrote small IPOs of $50 million. Major investment banks were no longer interested in such small fry.

Doll said his organization is talking with major and smaller banks, to encourage them to team up on arranging and underwriting IPOs.

The NVCA said in its proposal to the SEC it also wants to limit the roller coaster swings in prices that can accompany IPOs.

It is trying to provide more information to buyers through mechanisms such as Web-based portals, to better value a company. NVCA says start-ups should consider merging before an IPO to ensure bigger, less volatile stock issues.

The NVCA seeks a special 10 percent capital gains tax rate for IPO purchasers, which in nearly all cases would be a reduction from current rates, and tax incentives for cleantech, life sciences and other investments deemed helpful to the nation.

Finally, the NVCA will ask the SEC to help ease compliance requirements for the complex Sarbanes-Oxley Act.

Reporting by David Lawsky; Editing by Richard Chang

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