Venture Capitalism

VCs Invent Fake IPO Crisis To Convince Congress to Deregulate

Last month, Senators Chuck Schumer (D-N.Y.) and Pat Toomey (R-Pa.) introduced a new bill called the Reopening American Capital Markets to Emerging Growth Companies Act. Over at Fortune.com today, Dan Primack points out the major flaw with proposal: the problem that it’s trying to solve is “imaginary.”

The goal of the legislation is to help small and mid-sized companies go public by temporarily dismissing regulations, such as letting shareholders vote on whether senior company execs can get one of those sweet golden parachute deals. More companies listed in the public markets, Congress argues, means more jobs.

As the IPOs of profitless companies like Groupon and Pandora have made clear, however, it’s not actually that hard. As for the concern about smaller issuers, half of the VC-backed IPOs last year raised less than $100 million. Despite the fact that fewer VC backed companies went public, Mr. Primack also points out that:

“Through the middle of December, 52 companies backed by venture capital had raised $9.88 billion in 2011 via initial public offerings—names like LinkedIn (LNKD), Zynga (ZNGA), Fusion-io (FIO), and Zipcar (ZIP). A larger amount of money has been raised in only five other years since 1980. Does that sound like a job-killing drought?”

So why is Congress so eager to deregulate? Well, “Because venture capitalists have asked them to, and VCs are known to be very generous tippers (er, campaign contributors),” says Mr. Primack:

“The 10-year-return benchmark for venture capital is barely above breakeven (1.25%), according to Cambridge Associates. That means many VCs have lost money for their investors and are having difficulties raising new funds. What these zombies need are more liquidity events, and what better way to get them than by making it easier for their companies to go public? Not through a government-financed bailout, of course, but through a sort of government-aided mulligan of sorts.”

We like the can-do attitude, Congress. But how about throwing some of that weight into derailing SOPA instead? Non-imaginary issues need your attention too.

Follow Nitasha Tiku on Twitter or via RSS. ntiku@observer.com