VC Group Plots Familiar Strategy For Industry Recovery
The venture capital model might not be completely broken, but the chairman of the National Venture Capital Association says it needs to be fixed.
With only six venture-backed IPOs in 2008—the worst showing since 1976—NVCA chairman Dixon Doll says the venture industry needs to help restart stalled capital markets. Doll says the Virginia-based NVCA is preparing an initiative to restore the system by overhauling the pipeline for exciting new stocks, the venture capital industry. The recovery plan, which the NVCA plans to release in the next few weeks, includes recommendations for Congress and the VC industry as a whole.
Doll, a co-founder and general partner of Menlo Park, CA-based DCM, outlined the initiative in a breakfast presentation yesterday at the San Diego Venture Group. The session, billed as a venture capital outlook for 2009, drew more than 450 people.
“There are too many small companies out there today,” Doll told the crowd, “Our industry has not produced as many transformational companies in the past few years as it did in the previous decade.” He later suggested, “VCs need to be much more aggressive in consolidating companies…even within their own portfolios.”
Doll was outspoken about VC practices, saying the limited partners that invest in venture firms “are fed up with the mediocre returns.” He suggested that one way to improve investment returns is for VCs to stop investing in the underperforming companies in their portfolios. Doll was hardly alone, though, in criticizing VC performance during a panel discussion that included Amir Nashat, a general partner with Polaris Venture Partners in Boston, and Victor Westerlind, a general partner at RockPort Capital in Menlo Park, CA.
“To pretend that the world hasn’t changed is a recipe for disaster,” Nashat said. “Venture capital over the last 10 years has not been a great asset class. We have not outperformed other asset classes, as we have in the past.”
Westerlind agreed, suggesting that venture-backed companies may have to get creative in finding ways to raise capital—such as selling commercial rights to their products in certain parts of the world. “Companies are having to rethink how to get the money they need,” Westerlind said.
Doll identified a series of recommendations the NVCA is formulating, although several seemed like a recycled sampling of the industry’s talking points over the last decade.
—Promote investment vehicles that provide a late-stage alternative to IPOs by matching a company’s VC investors with buyers (which Doll described as “the Fidelities of the world”) in private stock placements “to get the VCs liquidity.”
—Change tax policies to encourage company formation.
—Streamline or eliminate counterproductive regulations. A PowerPoint image Doll displayed during his presentation identified “Sarbanes-Oxley reform” as a target, as well as “stock option expensing.”
—Increased government support for basic research and development. The VC industry still wants to reform restrictions on Small Business Innovation Research grants to give venture-backed startups access to SBIR funds.
—Change nature of investment banks, whilerestoring comprehensive equity research.
—Preserve internationally competitive capital gains treatment.
—Long-term cleantech policy.
—Human resources, described only as “immigration.” Doll did not discuss the NVCA’s recommendations on the issue, but the NVCA most likely wants to increase the number of skilled foreign immigrants allowed to work in the United States. The NVCA might want to rethink pushing again for this one if they want to avoid a public-relations backlash. Yesterday, the U.S. Labor Department reported the number of American workers receiving unemployment payments jumped to 4.78 million last week. That’s the most since the government began keeping records in 1967.
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