Collateral Damage: The Venture Capital Outlook and Potential

Joseph Schumpeter, in a celebrated phrase, noted that capitalism depends, for its foundation and longevity, on the “animal spirits” of the entrepreneurial class in a given region. Absent the turbo charge which the entrepreneurial culture has in the past projected into the U.S. economy, we in this country are in for an indefinite slide to economic stagnation. The national balance sheet is alarming, in the vicinity of insolvency; our manufactures are increasingly non-competitive; our labor force is displacing itself in favor of, eg, China, our currency is depreciating. I often use hypothetical benchmarks called (by me) the Fidelity Index ' an assumed list of factors professional investors are wont to use when rating and distinguishing between the debt of a AAA national credit and a Third World obligor state. Absent robust growth, look at our score card on the Index ' increasing debt as a percentage of GDP and GNP; balance sheet insolvency (in legal terms, insolvency 'in the bankruptcy sense'); extraordinary spending in the military sector growing rich/poor disparity; continuing barriers to women's rights; environmental indifference; wide spread tax evasion; attempts by both the Left and Right to politicize the judiciary; elections for sale; tainted election procedures; a state highly dependent on imported capital to recycle its debt.

Can we, as the current administration hopes and plans, grow our way out of the “no” or “slow” growth box? Taking the long view, we can ' at least we have in the past and very successfully. But the impetus, the sine qua non ingredient in our success, has been our system of generously rewarding risk takers ' from William Penn to William Gates. If, as current trends suggest, our cultural mandarins, our press, our law enforcement personnel, our academics, our opinion makers (from Talk Radio on up) … if all the above (driven by their internal metabolisms and/or perceptions of their personal advantage) are bent on (worst case) criminalizing risk, on making business failure at least a tort and perhaps a crime, on raising the bar of managerial responsibility until it is insurmountable, of bureaucratizing the private economy ' of, in a word, reintroducing the once-discredited theses of command, top-down economies ' we are on our way to a different economic and social outcome in the years ahead. And the signs are ominous. One of the most disturbing is the growing influence of tort lawyers on the political process – rich enough to buy ball teams (Angelos), a Senate seat and even (perhaps) the Presidency (Edwards).

A couple of years ago, I wrote a bullish piece, forecasting a bounce back from the busted 'bubble,' based on a number of positive factors I saw in the tech and human tech sector. Let me quote selectively.

“My point is that there is plausible evidence that we are at the beginning rather than at the end of at least two highly significant technological revolutions [biotech and computer-driven breakthroughs], even assuming that the Internet applications have crested.

“My thesis is modest. To be sure, the Nasdaq has crashed from its high (although it is a long way from where it was a few years ago), and Shiller's prediction in fact came true. But I have lived through those prior meltdowns that seem to occur at the end of each decade. And, this one is different, fundamentally different.

“First, the market did reach high peaks by any standards, and, accordingly, the nosedive has been “irrationally” severe. Yet, there is a buildup of scientific and technological breakthroughs, of energy, of risk capital, of global talent released or newly energized to play in the venture capital game ' a host of factors that prove to me at least that we are on the verge of a worldwide sustained boom because the metrics of our economic existence in the developed world are in the process of fundamental change ' a tectonic shift, to overuse the cliche.

“I invite you to test this thesis by thinking about your own children or grandchildren. Consider that their average life expectancy in the developed world, absent accident or catastrophe, is likely to be in the 100- to 125-year range, with full functionality until their 902. Then imagine a world in which, by virtue of improved distance learning (streaming video, interactive video, online tutorials), 10 million Chinese citizens have the equivalent of graduate engineering degrees from MIT. Then tell me there is no New Big Thing.” Bartlett, “Rational Exuberance,” J. of Wealth Management, 1 7 (Summer 2001).

Will all my prediction come true? Maybe not, I fear. Because I was wrong at the time? Perhaps, but the likelier explanation is the shock and awe of “Enronitis,” the toxic combination of severe stock market losses (this time involving all hands) and examples of astonishingly bad and stupid conduct which, first, sapped whatever investors confidence was left post 2001, Q1, and, secondly, generated the collateral damage as the victims, through their proconsuls, began the house-to-house search for the villains they somehow knew must be at fault (not including, of course, their own stupidity and bad luck). (Dick Foster & Sarah Kaplan, the authors of Creative Destruction are gifted observers, top drawer consultants beating the drum for innovative ' the key to economic survival in their view. As they point out, constant innovation is the key to long-range survival in the S&P 500. And, venture capital is key to the equation. To paraphrase their material, There is a difference in energies in the conventional R&D model of corporate innovation and in a venture capital where new development funds are run by partners with their own funds involved. The level of skill and adaptability is at a much higher level. Foster & Kaplan, Creative Destruction: Why Companies That Are Built to Last Underperform the Market ' and How to Successfully Transform Them, 174 (2001). The irony is that Dick and Sarah's paradigms for imaginative company re-inventions includes Enron, under former McKinsey partner, Andrew Fastow, without for a minute excusing appalling Enron behavior, the central failing at Enron is just that – the strategy failed. Cf. Samuel Gompers' quote that the worst sin an employer can visit on its employees is the failure to make a profit.)

The numbers, any way they are sliced, are compelling. The extraordinary post-war performance of the U.S. economy has been driven, in large part, by small business firms with under 100 employees. And, the jewel in the crown, if you like, of that growth, that element of the post-war economy which distinguishes the United States from the rest of the industrial world, which has provided us with economic hegemony, has been that activity loosely labeled venture capital. (“[C]ompanies backed by venture capital generate twice the sales, pay three times the federal tax and invest far more heavily in research and development as their traditionally financed counterparts ' companies backed by venture capital generate $643 in sales for every $1,000 in assets, compared with traditional companies, which have only $391 in sales. Venture-backed firms also spend considerably more m money on research and development costs: $44 per $1,000 in assets compared with $15 for others.” Johnson, “The Impact of Venture Backing; Recipients' Sales, Spending Top Traditionally Funded Firms,” The Washington Post, June 26, 2002.) To pick some devious examples of venture-backed company successes, and the impact on our economy, in 1990, Microsoft, Dell, and Cisco had combined sales of $2 billion, in 2000, their combined sales were $80 billion. Berenson, “Market Watch,” New York Times, March 4, 2001, Section 3. Despite intensive efforts around the globe by governments and private institutions, it has been difficult for other nation states and economic regions to recreate that felicitous combination of resources, talent, and financial technology which has been the engine of economic and technological development in this country, spawning and growing giant multi-national firms (tall oaks from little acorns), firms financed and nurtured by the managers of professional venture capitalist pools. There are a number of reasons why other countries have found it difficult (if not impossible) to mimic this sector of the U.S. economy, detailed in a number of commentaries. The matrix includes, of course, first class science, developed both privately and publicly (and transferable, by virtue of the Bayh Dole Act, from public to private ownership); a fair system of taxation, encouraging capital formation; a fair, predictable and enforceable legal system, including protection of intellectual property; a rational bankruptcy code, meaning entrepreneurial risk is not life threatening, and worthy firms can be rehabilitated; reasonable laws governing employment so that vulnerable firms can downsize in hard times without catastrophic expense; and a political structure which adjusts, both quickly and quietly, to changes the players in this sector require in order to maintain the growth curve. It is the last factor, a critical foundation of entrepreneurial growth, which is of current concern; I am troubled that the government, state and federal is turning against risk-takers, that the cult of victimization (every loss implies a villain) has the ear of ambitious politicians, to the exclusion of any other considerations.

Venture capital has benefited inordinately over the years from some quiet but highly influential, and in bureaucratic terms, bold changes in the way government and the emerging growth economy interact. I will name a few which will, I suspect, be generally unfamiliar, ie, the Plan Asset Regulation, Rev. Proc. 93-27; the de facto relaxation of the ban on general solicitation and general advertising in Rule 502(c); Bayh Dole; the rise of LLCs and Check-the-Box. The first released literally trillions of dollars for investment to the venture asset class, the second cleared the way for efficient methods of compensating the managers of venture funds, thereby attracting the best and the brightest to the field; the third allows, albeit, haphazardly, issuers to widen their search for private capital; the fourth effectively gives private industry a crack at government-owned research and development; and the fifth simplifies the tax rules affecting private entities, and reduces the risk of entity level tax. If you want to have some fun, and understand part of the problem we currently face in the venture sector, pose a short quiz to any and all so-called experts on private equity finance, which includes the following questions: First, give the two principal reasons why stock options are vital to the prosperity of emerging growth companies (if you include accounting treatment, go to the rear of the class). Secondly, identify the profound and positive implications of the above cited.

The importance to the U.S. economy of a robust system for financing emerging growth companies is generally conceded (as I think it must be): The question is whether recent events, including but not limited to the NASADAQ meltdown, are life threatening. And, for reasons I outline summarily in this alert, I suspect we are, in our relentless pursuit of 'bad guys,' inadvertently inhibiting the venture sector, to the point that our wealth and job creation engine can and will be substantially compromised.

The Problem

The venture capital process depends on the availability of capital which means, of course, that the asset class has to yield (on average) superior returns, given the high risk in any single venture investment. In the current climate, one of the significant sub-themes is that, in the public company context at least, the chieftains of Corporate America have been taking unnecessary risks and should be punished; the existence of a victim (ie, people who lose money in the stock market) necessarily implies the existence of a villain. This is not meant, of course, as an apology for some perfectly extraordinary (at least as alleged) instances of malfeasance. However, the side effects of the criminal, civil and Congressional necktie parties, the collateral damage if you will, will necessarily suggest to future Ken Lays and Bernie Ebbers (even those totally committed to ethical accounting and corporate governance) that the risks of the 'bet your company' variety will wind up being punished in the court of public opinion, and maybe in civil and criminal courts as well. The ultimate evidence of risk aversion is the proliferating appointment of lawyers, eg, Charles Prince at Citi Group, to the post of chief executive officer of a major U.S. company, the objective being not necessarily to enhance shareholder value (and few lawyers have been proven to be good at that game) but to keep the company out of trouble; as this country adds to its reputation as the most litigious society on the planet there is a non-fanciful possibility the our gross domestic product in the near future will be composed principally of the counsel fees and damage awards. With litigation a constant thorn in the side of every manager and board member of a public company, the attractiveness of public registration begins to approach zero Further, the impact of the new certification rules (congruent with some other unpromising factors) threaten to squelch the possibility of the IPO window ever reopening wide. IPOs historically have been a pillar of U.S. venture capital ' an open and liquid public market receptive to high tech companies in relatively early stages of their development. Traditionally, VCs have used the IPO exit in constructing their pricing models, assuming the IPO liquidity as the basis for their assumed terminal values. (“Because of cultural, language, and geographical factors, most high-tech companies face too many difficulties in listing on foreign stock markets … Black and Gilson (1998) study the VC market from the angle of the market structure and attribute the VC market success in the United States to the VC exit mechanism. They find that a strong stock-market-centered capital market is essential to the success of the VC market, because it enables VCs to exit earlier from the companies in which they have invested and earn more by taking their portfolio firms public … A VC market requires an active stock market to support its exit.” Wang, Wang & Lu, supra. n. 1 at 60.) And, again historically, the IPO exit is an order of magnitude or two larger than the alternative ' company sale. Use of IPOs in the standard models invigorates the process up and down the line, justifying a portfolio of risky investments on the theory that, if some percentage of the same turn out to be “portfolio makers” as a result of IPOs, then the VCs can take risks they would not otherwise be in a position to take, ' ie, if company sale were the only way to monetize their investments. Moreover, IPOs add to the choice of available public securities for investors to review … and allow venture-backed companies to grow as independents, eg, Microsoft as an independent and not a division of IBM; otherwise the public markets are the equivalent of a wasting asset, by dint of mergers and company buybacks. (“Do you know what companies like Starbucks, Intuit, Palm Computing, RF Micro Devices, Shiva Corp. and Wind River Systems (to name only a few) have in common? They all received their initial funding from venture capitalists in the most recent dark recessionary period of 1990-1992?” Goodman, Venture Capital Journal (Dec. 2001)). Without venture capital backing, Apple Computer, Intel, Lotus, Yahoo, Amazon and e-bay would be ideas, and not mega-corporations. Some would argue that IPOs are toxic, shell games designed to intrigue a gullible public into overpaying for junk. The point is that there are IPOs and then there are IPOs. If one looks at venture-backed IPOs, vs. the entire array, quite a different picture emerges. “A recent study shows that of the companies that have gone public since 1986, the ones that were backed by venture capitalists had the biggest rise in their stocks. The Securities Data Company, a financial information company based in Newark, reported that offerings backed by venture capital rose an average of 135.1 percent during the period, while offerings without venture capital rose an average of 35.5 percent, while the others averaged a mere 10.9 percent.” Marcia Vickers, “Nothing Ventured, Less Gain,” The New York Times, 1996.

The IPO market comes and goes, of course. But, so far at least, even though it shuts down every now and then, it has always returned. Now, I am not so sure.

In part two: How emerging companies can deal with the increasing regulatory constraints without the resources to hire experts and consultants.

Joseph Schumpeter, in a celebrated phrase, noted that capitalism depends, for its foundation and longevity, on the “animal spirits” of the entrepreneurial class in a given region. Absent the turbo charge which the entrepreneurial culture has in the past projected into the U.S. economy, we in this country are in for an indefinite slide to economic stagnation. The national balance sheet is alarming, in the vicinity of insolvency; our manufactures are increasingly non-competitive; our labor force is displacing itself in favor of, eg, China, our currency is depreciating. I often use hypothetical benchmarks called (by me) the Fidelity Index ' an assumed list of factors professional investors are wont to use when rating and distinguishing between the debt of a AAA national credit and a Third World obligor state. Absent robust growth, look at our score card on the Index ' increasing debt as a percentage of GDP and GNP; balance sheet insolvency (in legal terms, insolvency 'in the bankruptcy sense'); extraordinary spending in the military sector growing rich/poor disparity; continuing barriers to women's rights; environmental indifference; wide spread tax evasion; attempts by both the Left and Right to politicize the judiciary; elections for sale; tainted election procedures; a state highly dependent on imported capital to recycle its debt.

Can we, as the current administration hopes and plans, grow our way out of the “no” or “slow” growth box? Taking the long view, we can ' at least we have in the past and very successfully. But the impetus, the sine qua non ingredient in our success, has been our system of generously rewarding risk takers ' from William Penn to William Gates. If, as current trends suggest, our cultural mandarins, our press, our law enforcement personnel, our academics, our opinion makers (from Talk Radio on up) … if all the above (driven by their internal metabolisms and/or perceptions of their personal advantage) are bent on (worst case) criminalizing risk, on making business failure at least a tort and perhaps a crime, on raising the bar of managerial responsibility until it is insurmountable, of bureaucratizing the private economy ' of, in a word, reintroducing the once-discredited theses of command, top-down economies ' we are on our way to a different economic and social outcome in the years ahead. And the signs are ominous. One of the most disturbing is the growing influence of tort lawyers on the political process – rich enough to buy ball teams (Angelos), a Senate seat and even (perhaps) the Presidency (Edwards).

A couple of years ago, I wrote a bullish piece, forecasting a bounce back from the busted 'bubble,' based on a number of positive factors I saw in the tech and human tech sector. Let me quote selectively.

“My point is that there is plausible evidence that we are at the beginning rather than at the end of at least two highly significant technological revolutions [biotech and computer-driven breakthroughs], even assuming that the Internet applications have crested.

“My thesis is modest. To be sure, the Nasdaq has crashed from its high (although it is a long way from where it was a few years ago), and Shiller's prediction in fact came true. But I have lived through those prior meltdowns that seem to occur at the end of each decade. And, this one is different, fundamentally different.

“First, the market did reach high peaks by any standards, and, accordingly, the nosedive has been “irrationally” severe. Yet, there is a buildup of scientific and technological breakthroughs, of energy, of risk capital, of global talent released or newly energized to play in the venture capital game ' a host of factors that prove to me at least that we are on the verge of a worldwide sustained boom because the metrics of our economic existence in the developed world are in the process of fundamental change ' a tectonic shift, to overuse the cliche.

“I invite you to test this thesis by thinking about your own children or grandchildren. Consider that their average life expectancy in the developed world, absent accident or catastrophe, is likely to be in the 100- to 125-year range, with full functionality until their 902. Then imagine a world in which, by virtue of improved distance learning (streaming video, interactive video, online tutorials), 10 million Chinese citizens have the equivalent of graduate engineering degrees from MIT. Then tell me there is no New Big Thing.” Bartlett, “Rational Exuberance,” J. of Wealth Management, 1 7 (Summer 2001).

Will all my prediction come true? Maybe not, I fear. Because I was wrong at the time? Perhaps, but the likelier explanation is the shock and awe of “Enronitis,” the toxic combination of severe stock market losses (this time involving all hands) and examples of astonishingly bad and stupid conduct which, first, sapped whatever investors confidence was left post 2001, Q1, and, secondly, generated the collateral damage as the victims, through their proconsuls, began the house-to-house search for the villains they somehow knew must be at fault (not including, of course, their own stupidity and bad luck). (Dick Foster & Sarah Kaplan, the authors of Creative Destruction are gifted observers, top drawer consultants beating the drum for innovative ' the key to economic survival in their view. As they point out, constant innovation is the key to long-range survival in the S&P 500. And, venture capital is key to the equation. To paraphrase their material, There is a difference in energies in the conventional R&D model of corporate innovation and in a venture capital where new development funds are run by partners with their own funds involved. The level of skill and adaptability is at a much higher level. Foster & Kaplan, Creative Destruction: Why Companies That Are Built to Last Underperform the Market ' and How to Successfully Transform Them, 174 (2001). The irony is that Dick and Sarah's paradigms for imaginative company re-inventions includes Enron, under former McKinsey partner, Andrew Fastow, without for a minute excusing appalling Enron behavior, the central failing at Enron is just that – the strategy failed. Cf. Samuel Gompers' quote that the worst sin an employer can visit on its employees is the failure to make a profit.)

The numbers, any way they are sliced, are compelling. The extraordinary post-war performance of the U.S. economy has been driven, in large part, by small business firms with under 100 employees. And, the jewel in the crown, if you like, of that growth, that element of the post-war economy which distinguishes the United States from the rest of the industrial world, which has provided us with economic hegemony, has been that activity loosely labeled venture capital. (“[C]ompanies backed by venture capital generate twice the sales, pay three times the federal tax and invest far more heavily in research and development as their traditionally financed counterparts ' companies backed by venture capital generate $643 in sales for every $1,000 in assets, compared with traditional companies, which have only $391 in sales. Venture-backed firms also spend considerably more m money on research and development costs: $44 per $1,000 in assets compared with $15 for others.” Johnson, “The Impact of Venture Backing; Recipients' Sales, Spending Top Traditionally Funded Firms,” The Washington Post, June 26, 2002.) To pick some devious examples of venture-backed company successes, and the impact on our economy, in 1990, Microsoft, Dell, and Cisco had combined sales of $2 billion, in 2000, their combined sales were $80 billion. Berenson, “Market Watch,” New York Times, March 4, 2001, Section 3. Despite intensive efforts around the globe by governments and private institutions, it has been difficult for other nation states and economic regions to recreate that felicitous combination of resources, talent, and financial technology which has been the engine of economic and technological development in this country, spawning and growing giant multi-national firms (tall oaks from little acorns), firms financed and nurtured by the managers of professional venture capitalist pools. There are a number of reasons why other countries have found it difficult (if not impossible) to mimic this sector of the U.S. economy, detailed in a number of commentaries. The matrix includes, of course, first class science, developed both privately and publicly (and transferable, by virtue of the Bayh Dole Act, from public to private ownership); a fair system of taxation, encouraging capital formation; a fair, predictable and enforceable legal system, including protection of intellectual property; a rational bankruptcy code, meaning entrepreneurial risk is not life threatening, and worthy firms can be rehabilitated; reasonable laws governing employment so that vulnerable firms can downsize in hard times without catastrophic expense; and a political structure which adjusts, both quickly and quietly, to changes the players in this sector require in order to maintain the growth curve. It is the last factor, a critical foundation of entrepreneurial growth, which is of current concern; I am troubled that the government, state and federal is turning against risk-takers, that the cult of victimization (every loss implies a villain) has the ear of ambitious politicians, to the exclusion of any other considerations.

Venture capital has benefited inordinately over the years from some quiet but highly influential, and in bureaucratic terms, bold changes in the way government and the emerging growth economy interact. I will name a few which will, I suspect, be generally unfamiliar, ie, the Plan Asset Regulation, Rev. Proc. 93-27; the de facto relaxation of the ban on general solicitation and general advertising in Rule 502(c); Bayh Dole; the rise of LLCs and Check-the-Box. The first released literally trillions of dollars for investment to the venture asset class, the second cleared the way for efficient methods of compensating the managers of venture funds, thereby attracting the best and the brightest to the field; the third allows, albeit, haphazardly, issuers to widen their search for private capital; the fourth effectively gives private industry a crack at government-owned research and development; and the fifth simplifies the tax rules affecting private entities, and reduces the risk of entity level tax. If you want to have some fun, and understand part of the problem we currently face in the venture sector, pose a short quiz to any and all so-called experts on private equity finance, which includes the following questions: First, give the two principal reasons why stock options are vital to the prosperity of emerging growth companies (if you include accounting treatment, go to the rear of the class). Secondly, identify the profound and positive implications of the above cited.

The importance to the U.S. economy of a robust system for financing emerging growth companies is generally conceded (as I think it must be): The question is whether recent events, including but not limited to the NASADAQ meltdown, are life threatening. And, for reasons I outline summarily in this alert, I suspect we are, in our relentless pursuit of 'bad guys,' inadvertently inhibiting the venture sector, to the point that our wealth and job creation engine can and will be substantially compromised.

The Problem

The venture capital process depends on the availability of capital which means, of course, that the asset class has to yield (on average) superior returns, given the high risk in any single venture investment. In the current climate, one of the significant sub-themes is that, in the public company context at least, the chieftains of Corporate America have been taking unnecessary risks and should be punished; the existence of a victim (ie, people who lose money in the stock market) necessarily implies the existence of a villain. This is not meant, of course, as an apology for some perfectly extraordinary (at least as alleged) instances of malfeasance. However, the side effects of the criminal, civil and Congressional necktie parties, the collateral damage if you will, will necessarily suggest to future Ken Lays and Bernie Ebbers (even those totally committed to ethical accounting and corporate governance) that the risks of the 'bet your company' variety will wind up being punished in the court of public opinion, and maybe in civil and criminal courts as well. The ultimate evidence of risk aversion is the proliferating appointment of lawyers, eg, Charles Prince at Citi Group, to the post of chief executive officer of a major U.S. company, the objective being not necessarily to enhance shareholder value (and few lawyers have been proven to be good at that game) but to keep the company out of trouble; as this country adds to its reputation as the most litigious society on the planet there is a non-fanciful possibility the our gross domestic product in the near future will be composed principally of the counsel fees and damage awards. With litigation a constant thorn in the side of every manager and board member of a public company, the attractiveness of public registration begins to approach zero Further, the impact of the new certification rules (congruent with some other unpromising factors) threaten to squelch the possibility of the IPO window ever reopening wide. IPOs historically have been a pillar of U.S. venture capital ' an open and liquid public market receptive to high tech companies in relatively early stages of their development. Traditionally, VCs have used the IPO exit in constructing their pricing models, assuming the IPO liquidity as the basis for their assumed terminal values. (“Because of cultural, language, and geographical factors, most high-tech companies face too many difficulties in listing on foreign stock markets … Black and Gilson (1998) study the VC market from the angle of the market structure and attribute the VC market success in the United States to the VC exit mechanism. They find that a strong stock-market-centered capital market is essential to the success of the VC market, because it enables VCs to exit earlier from the companies in which they have invested and earn more by taking their portfolio firms public … A VC market requires an active stock market to support its exit.” Wang, Wang & Lu, supra. n. 1 at 60.) And, again historically, the IPO exit is an order of magnitude or two larger than the alternative ' company sale. Use of IPOs in the standard models invigorates the process up and down the line, justifying a portfolio of risky investments on the theory that, if some percentage of the same turn out to be “portfolio makers” as a result of IPOs, then the VCs can take risks they would not otherwise be in a position to take, ' ie, if company sale were the only way to monetize their investments. Moreover, IPOs add to the choice of available public securities for investors to review … and allow venture-backed companies to grow as independents, eg, Microsoft as an independent and not a division of IBM; otherwise the public markets are the equivalent of a wasting asset, by dint of mergers and company buybacks. (“Do you know what companies like Starbucks, Intuit, Palm Computing, RF Micro Devices, Shiva Corp. and Wind River Systems (to name only a few) have in common? They all received their initial funding from venture capitalists in the most recent dark recessionary period of 1990-1992?” Goodman, Venture Capital Journal (Dec. 2001)). Without venture capital backing, Apple Computer, Intel, Lotus, Yahoo, Amazon and e-bay would be ideas, and not mega-corporations. Some would argue that IPOs are toxic, shell games designed to intrigue a gullible public into overpaying for junk. The point is that there are IPOs and then there are IPOs. If one looks at venture-backed IPOs, vs. the entire array, quite a different picture emerges. “A recent study shows that of the companies that have gone public since 1986, the ones that were backed by venture capitalists had the biggest rise in their stocks. The Securities Data Company, a financial information company based in Newark, reported that offerings backed by venture capital rose an average of 135.1 percent during the period, while offerings without venture capital rose an average of 35.5 percent, while the others averaged a mere 10.9 percent.” Marcia Vickers, “Nothing Ventured, Less Gain,” The New York Times, 1996.

The IPO market comes and goes, of course. But, so far at least, even though it shuts down every now and then, it has always returned. Now, I am not so sure.

In part two: How emerging companies can deal with the increasing regulatory constraints without the resources to hire experts and consultants.