Congress enables a start-up

Cite this Article
Larry Ribstein, Congress enables a start-up, Truth on the Market (July 19, 2010),

The WSJ reports on the sad state of venture capital:

[F]und raising has now come to a near halt. Thomson Reuters estimates U.S. venture-capital funds raised just $1.9 billion in the second quarter. By comparison, in the same period of 2000, the peak year, funds raised $33 billion. In 2009, just 170 funds raised new money, compared with 749 in 2000. It isn’t just investors who are walking away. Many venture-capital money managers who joined the game after the ’90s have never had a big payday. A decade without performance fees is no incentive to keep digging for deals. * * *

This drought isn’t likely to end soon. The market for small-cap stocks has become less liquid as many regional investment banks that specialized in fledgling companies have shuttered. Sarbanes-Oxley reporting requirements have also added several million dollars to the annual cost of being listed, significant for firms on the cusp of profitability.

The WSJ notes that venture-backed firms’ “main exit route” is “selling to strategic buyers” – big companies like Google. But where will future Google-type wealth-creation engines come from? The article notes that “[w]ithout another big technological shift, innovation opportunities will likely be harder to find.” But who is going to drive innovation? Today’s bureaucracy-laden behemoths, growing ever larger by eating start-ups?

There are little specks of light. Green Dot, an innovator in prepaid debit-cards, is set to go public this week. I got to see the enthusiasm this sort of event generates in the startup community when I spoke to and attended a regional Tech Coast Angels event last week in Long Beach. TCA provided initial funding and encouragement for Green Dot.

The Green Dot offering is happening in part because Congress exempted Green Dot from onerous restrictions on interchange fees imposed by Dodd-Frank. Here are stories from Reuters and the WSJ.

Unfortunately, not all entrepreneurs have been able to escape increasing regulatory burdens on small firms. While Dodd-Frank exempts small-cap firms from the onerous internal controls attestations requirement, it imposes new governance burdens on public firms. And the vast bulk of SOX still hovers over public firms, imposing higher per-cap costs on smaller firms. Meanwhile, small firms will pay for Dodd-Frank’s other constraints on financing, such the collateral requirements for end-users of derivatives. All of these burdens bite especially hard in an economy which is generally not conducive to financing.

So the start-up drought, with its accompanying drag on employment and innovation, is likely to continue. We should be thankful for the green sprouts that Congress allows.