NVCA 4-Pillar Plan


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Recommendations from the National Venture Capital Association on how to improve the climate for venture-backed companies to go public

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NVCA 4-Pillar Plan

  1. 1. NVCA 4-Pillar Plan to Restore Liquidity in the U.S. Venture Capital Industry April 29/30, 2009 Dixon Doll DCM Co-Founder and General Partner, NVCA Chairman Mark Heesen NVCA President 1
  2. 2. Reinvigorating Liquidity in the U.S. VC Industry The Background The Situation The Solution Liquidity Challenges ● Job Creation Lack of IPOs Is ● Harmful to Job Innovation Creation and Overall Economy I II III IV Ecosystem Enhanced Taxation Regulation Partners Liquidity Comprehensive ● Paths Review of VC Ecosystem Is Required to Reinvigorate Our VC Industry U.S. Government Industry (once Financial Crisis & IPO Markets Stabilize) Drought Revealed Systemic Issues 2
  3. 3. Venture Capital Fuels Job Creation VC-Backed Companies 92% of Job Growth Create Jobs Faster Occurs Post-IPO Employment CAGR (2006 – 2008) VC-Backed Company Employment Growth 97% 94% 88% 76% 92% Pre-IPO Post-IPO 12.1M Jobs Created Sources: Left: Global Insight, 2009 Right: NVCA, Global Insight and Survey of Top 136 VC-Based Companies That Went Public 1970–2005 3
  4. 4. Numerous World-Leading Companies Were First Funded or Founded During Downturns 1970s 1980s 1990s 2000s F 4
  5. 5. Dramatic Decline in IPOs in the 2000’s Number of Venture-Based IPOs vs. M&A Exits 2000s 1990s 1,776 392 IPOs M&A IPOs M&A 13% 87% 56% 44% IPOs IPOs (’01 – ’08) (’92 – ’00) Lack of IPOs Is Harmful to Job Creation and Economy Source: Thomson Reuters/NVCA 5
  6. 6. IPOs in Decline This Decade Number and Value of Venture-Backed IPOs in the U.S. Number of IPOs IPO Value ($B) * Base Year 1998 = 100 Sources: Qatalyst Partners, Securities Data Company (All U.S. venture-backed IPOs of > $10MM from 1978 through 1991) Dow Jones VentureSource (All U.S. venture-backed IPOs from 1992 through December 31, 2008) 6
  7. 7. The Recent Realities of Venture-Backed M&As and IPOs Longer Time to IPO and M&A Median Age at IPO 4.5 9.6 Years Years 1998 2008 Median Age at M&A 3 6.5 Years Years 2008 1998 Source: Thomson Reuters, Dow Jones VentureSource 7
  8. 8. The Death of the Under $50M IPO 100 90 Transactions Raising $50M+ 80 70 60 Percent of 50 Total IPOs 40 30 20 Transactions Raising Less Than $50M 10 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008* 80% of IPOs 20% of IPOs Smaller than $50M Smaller than $50M *Data Includes Corporate IPOs as of 10/31/08. (Excludes Funds, REITs, SPACs and LPs). Source: Dealogic, Capital Markets Advisory Partners 8
  9. 9. NVCA 4-Pillar Plan to Restore Liquidity in the U.S. Venture Capital Industry Job Creation Innovation I III II IV Ecosystem Tax Enhanced Regulation Partners Incentives Liquidity Paths VC Industry U.S. Government 9
  10. 10. NVCA Plan: Pillar I – Ecosystem Partners Job Creation I-Banks Innovation VC Firms Buy Side Ecosystem I III II IV Partners Entrepreneurs Exchanges Ecosystem Tax Enhanced Regulation Partners Incentives Liquidity Paths Accounting Law Firms Firms VC Industry U.S. Government 10
  11. 11. I A Vacuum Exists for Small, Medium-Size Company IPOs Implicit Post-IPO Company Valuation ($MM) Boutique banks needed to help cover unserved areas $500 Would You Consider a Boutique I-Bank To Be the $400 Lead Book Runner for Going Public on a U.S. Stock Exchange?* $300 NO MAN’S LAND $200 32% 32% No Not Sure 36% $100 Yes IPOs not Appropriate $0 * Source: DCM Analysis / $25 $50 $75 $100 Survey of Venture-Backed Companies, 2009 – Size of IPO Offering ($MM)1 Participants (N) = 108 21st Century Versions of “4 Horsemen” Required : Assuming 25% of Company Sold in IPO 1 11
  12. 12. Major I-Banks and Big 4 Accounting Firms I Dominate U.S. IPOs Recent VC-Backed IPOs Nov. 2007 Feb. 2009 IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 I-Bank at IPO Audit Firm at IPO Investment Bank Audit Firm IPO Managed by Major I-Banks Traditional Big 4 IPO Co-Managed by Boutique and Major I-Banks Traditional Non-Big 4 IPO Managed by Boutique Bank Only 15 Out of 21 Recent IPOs Led by Major I-Banks and Big 4 Accounting Firms Source: NVCA, Thomson Reuters 12
  13. 13. I Accounting Firms Examined More Closely NVCA Recommends Use of New Terminology “The Global Six” in Describing Major International Accounting Organizations Qualified to Support Venture-Backed Portfolio Companies The Global Six Deloitte LLP KPMG LLP ● ● Ernst & Young LLP PricewaterhouseCoopers LLP ● ● Grant Thornton LLP BDO Seidman LLP ● ● Recent Research Performed by Capital Markets Advisory Partners (an Independent Advisory Firm) and Validated by the Above Six Firms, Shows All Six Organizations Have Created Global Accounting Networks Operating in More than 90 Countries Worldwide.* * Source: “Which Audit Firms are Accepted by Wall Street? A Reference Guide by Capital Markets Advisory Partners, 2009, Version 1.0 13
  14. 14. I NVCA Promoting Alternate Ecosystem Partners Investment Banks Accounting Firms NVCA Organizing Workshops NVCA Meeting with “Global Six” ● ● With Boutique Banks and Large Accounting Firms to Discuss Facilitate I-Banks to Identify and Address Needs of VC-backed Companies Needs of Emerging Growth and Ways To Provide Better Companies Worldwide Support NVCA Encourages Joint Book NVCA Encourages Obtaining ● ● Running (Major Bank and Bids From Global Six and Non- Encourage Boutique Bank Partnership) with Global Six Accounting Firms as Fee Sharing as a Desirable Desirable Practice in IPO Practice Planning NVCA Actions Can Create More Competitive Ecosystem 14
  15. 15. I Other Ecosystem Partner Recommendations I-Banks and VCs need to cultivate and ● nurture new buyers / funds specializing in venture IPOs Accounting Firms encouraged to ● provide lower-cost services to IPO candidate portfolio companies 15
  16. 16. NVCA Plan: Pillar II – Enhanced Liquidity Paths Job Creation Innovation I II III IV Ecosystem Enhanced Tax Regulation Partners Liquidity Incentives Paths VC Industry U.S. Government 16
  17. 17. II Current Liquidity Mechanisms Public Sellers Current I-Banks Market Buyers (Portfolio Companies) (Institutional/Strategic) Too Many Public Market Jitters Restricted Analyst and ● ● ● Companies Below I-Banker Collaboration Short Selling Increases ● Critical Mass Market Volatility Undergoing Massive ● Too Few Organizational Changes ● Minimum Bite Size ● Transformative Due Diligence Burden Companies ● Distribution System Is Broken 17
  18. 18. II Enhanced Liquidity Mechanisms In Addition to Major I-Banks we Need Innovative Boutique Banks ● Serving Emerging Growth Companies Use of New Private Market Platforms ● – InsideVenture – PORTAL Alliance (NASDAQ) Enhancements – SecondMarket – Xchange – Other Additional Use of Global Financing / Fundraising and International ● Stock Exchanges 18
  19. 19. Enhanced Liquidity Mechanisms – Example II Public Sellers New Liquidity Platforms Market Buyers (Portfolio Companies) (Institutional/Strategic) VC-Backed Private Market Platform ● Access to Long- Pre-Screened Deal Flow ● ● Enforced Membership Criteria ● Term Investors Efficient Due Diligence ● Last Round of Financing $20-200MM – Accelerated Fund ● Increased Visibility Seeking to Go Public in 6-18 Months – ● Raising In-House Vetting Process, ● Including Company Information Portal, Conferences New Platforms Will Increase VC Ecosystem Liquidity 19
  20. 20. NVCA Enhanced Liquidity II Mechanism Recommendations II. Portfolio Companies III. Pro-Active M&A I. Liquidity Platforms • Raise Rounds From • Venture Firms • Venture Firms Global Financing Encouraged to Pro- Encouraged to Use Sources actively Explore M&A Enhanced Liquidity Roll-Up of Smaller Mechanisms Such as • Explore Global M&A Portfolio Companies InsideVenture and • Explore IPOs on Intl. to Achieve IPO Others Stock Exchanges Critical Mass • Consider Longer Lock- Ups to Increase Demand for Venture- Backed IPOs 20
  21. 21. NVCA Plan: Pillar III – Tax Incentives Job Creation Innovation I II III IV Ecosystem Enhanced Tax Regulation Partners Liquidity Incentives Paths VC Industry U.S. Government 21
  22. 22. III NVCA Pro-Growth Taxation Recommendations New Preserve Adopt New Tax Incentive to ● Keep Long-Term Capital Gains Tax ● Stimulate IPOs Rate Globally Competitive One Time Only – Preserve Meaningful Differential ● 10% Capital Gains Tax Rate for IPO Between Ordinary Income and – Purchaser and Investors Long-Term Capital Gains Tax Rates Only Applicable for Holding Periods > – Promote Tax Incentives for Venture ● 2-3 Years Capital Investments of Certain Consider a Longer Holding Period for Types and Sizes (e.g. Cleantech, ● Long-Term Capital Gains Life Sciences) Special IPO Program Will Increase Government Revenues 22
  23. 23. NVCA Plan: Pillar IV – Regulation Job Creation Innovation I II III IV Ecosystem Enhanced Tax Regulation Partners Liquidity Incentives Paths VC Industry U.S. Government 23
  24. 24. IV Barriers to Going Public on U.S. Stock Exchanges Exit Route Preference Top 3 Barriers to Going Public # of Responses Answered as a Top 3 Issue and Expectation (Participants = 108) (n=108) Compliance Requirements (Sarbanes-Oxley, Audit, Governance) M&A Increased Volatility in the Public Markets M&A Better Alternative (Faster Process, More Liquidity) Investment-Banking Related Issues (Analyst Coverage, Requires High Rev Threshold) Transaction Costs of Going Public (Legal, Banker Fees, Non-Compliance Related Costs) IPO Higher Perceived Litigation Risk from U.S. Investor Base Other Current Regulation Has a Major Impact on How Emerging Companies Consider their Exit Route Source: DCM Analysis/Survey of Venture-Backed Companies, 2009 24
  25. 25. IV Uncoordinated Regulations Severely Harm Small Companies Regulations Original Intent Unintended Impact Reduce Fraud Prohibitively Expensive for Small Companies ● ● Sarbanes Restore Confidence Extended Time to IPO ● ● Oxley M&A More Attractive ● Eliminate I-Bank Conflict Sell Side Analyst Exodus ● ● “Spitzer of Interest Reduced Analyst Coverage and ● Decree” Aftermarket Support Equal Information Access Communication Gap Grows Between Small ● ● Reg. Fair for All Investors Caps and Potential Buyers Disclosure Faster Development of Restrictions Limit Usefulness ● ● Rule 144A Private Placements Regulations Need Updating to Eliminate Unintended Consequences 25
  26. 26. IV NVCA Recommendations for Regulatory Changes Pre-IPO Post-IPO Private Placement • 144A – Expand Definitions of • Permit À La Carte • Suspend Minimum Market Cap Qualified Institutional Buyers Disclosure System Requirements • 144A – Relax Requisite Holding • Permit Confidential • Prohibit Short Sales of Newly Periods and Volume Registration Filings Issued Company Shares for at Restrictions Least 12 Months • Phase in SOX 404 • NASDAQ/Portal Alliance – Open Requirement For Small • Expand Usage of Form S-3 to It Up to Private Companies and Companies Enable Offerings Beginning 90 Accredited Investors Days Post IPO • Permit Research Analysts to Better Collaborate with Both • Eliminate Restrictions on Use of the Issuer and Investment S-3 for Certain Primary Offerings Bankers During the IPO of Non-accelerated Filers Process • Revise Requirement • Relax Financial Statement for Obtaining Shareholder Requirements Approval to Sell Securities Below Market or Book Value • Educate CFOs on Reg FD Restrictions and Allowances NVCA Requests Full SEC Review of Recent Laws to Streamline Small Company IPO Process 26
  27. 27. NVCA 4-Pillar Plan Summary Job Creation • Request Full SEC Regulatory • Stimulate Ecosystem Review to Streamline Small Competition : I-banks Innovation Company IPO Process (Majors/Boutiques), Law • Eliminate Harmful Spitzer Firms, Acctg. Firms Settlement Provisions (Global Six - Lower • Relax SOX 404 Compliance Costs) I II III IV Restrictions and Permit • Encouraging Joint Book Optional Extended Lock-ups Running with Shared Ecosystem Enhanced Tax Regulation • Expand usability of NASDAQ Economics Partners Liquidity Incentives PORTAL Alliance to private Paths • Cultivate New Buyers / companies and accredited Funds for IPOs investors VC Industry U.S. Government • Adopt New Tax Incentive to Stimulate IPOs: • Use New Platforms for Linking Buyers and Sellers One Time Only (Like InsideVenture) • Keep Long-Term Capital Gains Rate Competitive • Encourage Use of Global Funding Sources for New Rounds, M&A and IPOs • Promote Tax Credits for VC Investments of Certain Types/Sizes (e.g. Cleantech) • Utilize Pro-Active M&A to Achieve Critical Mass • Consider Longer Holding Period for Long-Term capital Gains 27
  28. 28. NVCA Expresses Its Appreciation Harry W. Kellogg, Jr., Silicon Valley Bank The NVCA Board of Directors ● ● Stan Lapidus, Helicos Hassan Ahmad, Sonus Networks ● ● Bob McCooey NASDAQ Mike Brooks, Venrock ● ● Michael Millman, JP Morgan Stuart Cable, Goodwin Procter ● ● Chuck Newhall, NEA James L. Callinan, RS Investments ● ● Duncan Niederauer, NYSE Euronext Frank Currie, Partner, Davis Polk & Wardwell ● ● Sandy Robertson, Robertson Stephens Scott Cutler, NYSE Euronext ● ● James D. Robinson III, RRE Ventures Ash Dahod, Starent Networks ● ● Bill Schnoor, Goodwin Procter Mona DeFrawi, InsideVenture ● ● Antoinette Schoar, MIT Paul Deninger, Jefferies & Co. ● ● Larry Sonsini, Wilson Sonsini Goodrich & Rosati Susan Page Estes, Global VC Coverage, UBS ● ● AG David Topper, JP Morgan ● Irwin Federman, USVP ● Brian Truesdale, Deutsche Bank ● Leslie Wolff Golden, Ridgewood Capital ● David Weild, Markets Advisory Partners ● Bob Grady, The Carlyle Group ● Thom Weisel, Thomas Weisel Partners ● Bill Hambrecht, W.R. Hambrecht + Co. ● Rian Wren, Neutral Tandem ● Felda Hardymon, Harvard Business School ● Thanks to DCM, Highland Capital Partners, the NYSE and Wilson Sonsini for their generosity in hosting the Blue Ribbon dinners 28
  29. 29. Thank You 29