U.S. VCs starting to experience the "Canadian Pain"

If you stop by here with any frequency, you’ll be aware of the crisis in the Canadian start-up and venture capital industry. The perceived large decrease in U.S. VC fundings last quarter is causing many of our American friends to adopt the same word. Funds are finding it harder to raise capital, and several are the “walking dead” as PE Hub has termed them. The only difference is that the lack of IPO liquidity is seen to be a key cause of the U.S. circumstance.

Got that? The issue isn’t poor returns, the issue is lack of IPOs to generate liquidty and jobs (and therefore returns for LPs and tax revenue for governments). Canadian VCs need to adopt a similar theme.

Doesn’t it seem odd that when Canadian Limited Partners use the phrase, “poor returns” is often a synonym for “weak VCs” or “bad asset class”? But in the U.S., it means “no IPO market”.

Here is a link to the presentation shared by the National Venture Capital Association (“NVCA”) at their annual meeting in Boston earlier this week. Some highlights:

– financial crisis and IPO drought have revealed “systemic” issues in the U.S. VC industry
– lack of IPOs is harmful to job creation and the overall U.S. economy
– a comprehensive review of the VC ecosystem is required
– statistically, VC-backed companies create jobs faster than non-VC-backed
– even still, 92% of job growth comes post-IPO
– in terms of IPOs versus M&A exits, 56% of all “liquidity events” in the 1992-2000 timeframe were via IPO; while only 13% came that way in 2000-2008
– far longer time to IPO exit: in 1998, the median company age at IPO was 4.5 years, in 2008 it was 9.6 years
– 70% of a VCs’ gain on an investment comes post-IPO
– also a far longer time to M&A exit: in 1998, the median company age was 3 years, in 2008 it was 6.5 years
– huge decline in IPOs raising less than US$50 million
– not enough boutique investment banks to handle the SME companies who have IPO valuations below US$400 million and/or are raising less than US$75 million on the IPO
– Large Investment Banks continue to dominate the IPO industry: 36% of 108 venture-backed companies surveyed said they would consider a Boutique investment bank for their U.S. IPO lead, while the balance said “no” or “not sure”
– major investment banks and Big 4 accounting firms continue to dominate IPO tables: 15 out of 21 recent IPOs were lead by major i-banks with Big 4 accounting firms; 2 of 21 were co-led by big i-banks
– therefore, the “Big 4” need to become the “Global 6” by including Grant Thornton and BDO
– NVCA needs to encourage large investment banks to share IPO lead with boutique i-banks
– investment banks need to cultivate new buyers for IPOs
– accounting firms need to offer lower-cost services for IPO candidates
– current IPO distribution system is “broken”
– encourage use of alternative trading platforms and exchanges for IPOs; also encourage use of international stock exchanges (the TSX will be delighted by that point)
– encourage use of a specific “Inside Venture” platform that would pre-screen IPO candidates for the US$20-$200 million valuation universe
– portfolio companies need to raise rounds from global financing sources to increase their profile and resources
– VCs need to consider longer lock-ups to increase demand for IPOs
– VCs should spearhead roll-ups of smaller players to achieve IPO critical mass level
– U.S. government should adopt tax incentives to stimulate IPOs
– uncordinated regulations hurt IPO prospects: SOX, “Spitzer Decree”, Regulation F.D., Rule 144a: these need to be updated
– SEC review of all laws to streamline IPO process

Quite a comprehensive review indeed.

For those of us trying to change the Canadian Start-Up and VC circumstance, we should take our work to the next level, and branch out beyond dialogue with governments to include many of the stakeholders involved in the NVCA’s effort (such as stock exchanges, i-banks, the buyside and accounting firms).

MRM
(hat tip CN)