Collateral Damage: The Venture Capital Outlook and Potential Collateral Damage and our "No Growth" Economic Future; How "Enronitis" Threatens to Stifle Entrepreneurial "Animal Spirits

Part 1 dealt with how companies in America, post-Enron, are being risk averse, to the point of naming attorneys CEOs to keep companies out of hot water at the potential expense of return that comes with risk, which is not necessarily in the best interest of shareholders. Part 2 will discuss how emerging companies can deal with the increasing regulatory constraints without the resources to hire experts and consultants.

Some mainstream economists, of course, contend that the IPO market recently has been too robust, leading to the bubble and hence, the 'morning after' effect of the meltdown. Point conceded. But the problem is that the remedial overreaction threatens, as they say, to throw the baby out with the bath water. For promising issuers, the detriments of public registration threaten to outstrip the benefits. Thus, for a fledgling company the ability to deal with the Draconian certification requirements on the CEO, CFO, audit committees, and board members is constrained by finance. A big public company can hire a myriad of experts to review the disclosures backwards and forwards, it can create an internal audit mechanism reporting to a well paid audit committee, with experienced hands as independent directors: it can collect opinions of counsel, certificates from staffers and construct a paper trail which takes the sting out of the new rules. Fledgling companies do not enjoy that kind of resource base. Further, the undeclared war on the analyst community will reduce coverage below the unsatisfactory level which currently exists. Bartlett, “Cover Me, I'm Going In,” Buzz of the Week (8/2/2001), VCExperts.com. Many newly public companies, if not covered by the analysts employed by the investment bank which brought the company public, are not going to have any coverage at all. This means a berth in the so-called “orphanage,” with the stock price trailing off, liquidity diminished to the “trading by appointment” level and hence, the benefit/burden analysis tilting strongly against the IPO at an exit mechanism. Add in the geometric increase in strike suit litigation by the plaintiffs' bar, the most powerful end of the law business and well funded to take on new assignments, and you have a situation where an increasing number of issuers in the venture space will simply dump the IPO prospect and sell out at the first opportunity – bad news all around for the venture industry. If the sell side analysts do not get paid by the investment banking side of the house, the question is who does pay them, particularly to cover small cap stocks; the volume of tickets written by an under $1 billion market company is not sufficient to provide the wherewithal for compensation. To be sure, there are silver linings to this cloud. Vista Research, for example (I am an advisor), a new player bent on selling research without a bias because Vista has no affiliation with either side. But, as a general matter the prospect of fewer analysts is also not promising for venture capital. Bringing a company public only to see it fall into so-called orphanage, is not a prospect anyone would relish. See Buzz of the Week, “Cover Me, I'm Going In,” supra. n. 6.