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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 to Restore Liquidity in the U.S. Venture Capital Industry
April 29/30, 2009Dixon Doll
DCM Co-Founder and General Partner, NVCA Chairman
Mark HeesenNVCA President
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Reinvigorating Liquidity in the U.S. VC Industry
The Background
Financial Crisis & IPO Drought Revealed Systemic Issues
The Situation
● Liquidity Challenges● Lack of IPOs Is
Harmful to Job Creation and Overall Economy
● Comprehensive Review of VC Ecosystem Is Required to Reinvigorate Our Industry (once Markets Stabilize)
Job Creation
IEcosystem
Partners
IIEnhanced Liquidity
Paths
IIITaxation
IVRegulation
VC Industry U.S. Government
Innovation
The Solution
3
Venture Capital Fuels Job Creation
Sources: Left: Global Insight, 2009Right: NVCA, Global Insight and Survey of Top 136 VC-Based Companies That Went Public 1970–2005
VC-Backed CompaniesCreate Jobs Faster
Employment CAGR (2006 – 2008)
12.1M Jobs Created12.1M Jobs Created
92% of Job GrowthOccurs Post-IPO
VC-Backed Company Employment Growth
97% 94% 88% 76% 92%
Pre-IPO Post-IPO
4
F
Numerous World-Leading Companies Were First Funded or Founded During Downturns
1970s1970s 1980s1980s 1990s1990s 2000s2000s
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2000s
Dramatic Decline in IPOs in the 2000’s
Source: Thomson Reuters/NVCA
1990s
IPOs56%
M&A44%
(’92 – ’00)
Number of Venture-Based IPOs vs. M&A Exits
Lack of IPOs Is Harmful to Job Creation and EconomyLack of IPOs Is Harmful to Job Creation and Economy
1,776IPOs
392IPOs
IPOs13%
M&A87%
(’01 – ’08)
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IPOs in Decline This DecadeNumber and Value of Venture-Backed IPOs in the U.S.
IPO Value ($B) Number of IPOs
* Base Year 1998 = 100Sources: 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)
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Source: Thomson Reuters, Dow Jones VentureSource
The Recent Realities of Venture-Backed M&As and IPOs
Longer Time to IPO and M&AMedian Age at IPO
Median Age at M&A
1998
4.54.5YearsYears
2008
9.69.6YearsYears
1998
33YearsYears
2008
6.56.5YearsYears
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The Death of the Under $50M IPO
*Data Includes Corporate IPOs as of 10/31/08. (Excludes Funds, REITs, SPACs and LPs).Source: Dealogic, Capital Markets Advisory Partners
Percent ofTotal IPOs
80% of IPOs Smaller than $50M
20% of IPOs Smaller than $50M
Transactions Raising $50M+
Transactions Raising Less Than $50M
0
10
20
30
40
50
60
70
80
90
100
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008*
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Job Creation
IEcosystem
Partners
IIEnhanced Liquidity
Paths
IIITax
Incentives
IVRegulation
VC Industry U.S. Government
Innovation
NVCA 4-Pillar Plan to Restore Liquidity in the U.S. Venture Capital Industry
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NVCA Plan: Pillar I – Ecosystem Partners
Job Creation
IEcosystem
Partners
IIEnhanced Liquidity
Paths
IIITax
Incentives
IVRegulation
VC Industry U.S. Government
InnovationI-BanksI-Banks
AccountingAccountingFirmsFirms
ExchangesExchanges
Law FirmsLaw Firms
VC FirmsVC Firms
EntrepreneursEntrepreneurs
EcosystemPartners
Buy SideBuy Side
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Size of IPO Offering ($MM)1
NO MAN’S LANDNO MAN’S LAND
IPOs not IPOs not AppropriateAppropriate
$25 $50 $75 $100$0
$100
$200
$300
$400
$500
A Vacuum Exists for Small, Medium-Size Company IPOs
1: Assuming 25% of Company Sold in IPO
Implicit Post-IPO Company Valuation($MM)
Boutique banks needed to help cover unserved areas
I
21st Century Versions of “4 Horsemen” Required21st Century Versions of “4 Horsemen” Required
Would You Consider a Boutique I-Bank To Be the
Lead Book Runner for Going Public on a U.S.
Stock Exchange?*
* Source: DCM Analysis / Survey of Venture-Backed Companies, 2009 – Participants (N) = 108
36%Yes
32%No
32%Not Sure
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15 Out of 21 Recent IPOs Led by Major I-Banks 15 Out of 21 Recent IPOs Led by Major I-Banks and Big 4 Accounting Firmsand Big 4 Accounting Firms
Major I-Banks and Big 4 Accounting Firms Dominate U.S. IPOs
Source: NVCA, Thomson Reuters
I-Bankat IPO
Audit Firm at IPO
Recent VC-Backed IPOs
IPO1
IPO2
IPO3
IPO4
IPO5
IPO6
IPO7
IPO8
IPO9
IPO10
IPO11
IPO12
IPO13
IPO14
IPO15
IPO16
IPO17
IPO18
IPO19
IPO20
IPO21
Investment Bank
IPO Managed by Major I-Banks
IPO Managed by Boutique Bank Only
Audit Firm
Traditional Big 4
Traditional Non-Big 4IPO Co-Managed by Boutique and Major I-Banks
I
Nov. 2007 Feb. 2009
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NVCA Recommends Use of New Terminology “The Global Six” in Describing Major International Accounting Organizations Qualified to
Support Venture-Backed Portfolio Companies
Recent Research Performed by Capital Markets Advisory Partners Recent Research Performed by Capital Markets Advisory Partners (an Independent Advisory Firm) and Validated by the Above Six Firms, Shows (an Independent Advisory Firm) and Validated by the Above Six Firms, Shows All Six Organizations Have Created Global Accounting Networks Operating in All Six Organizations Have Created Global Accounting Networks Operating in
More than 90 Countries Worldwide.*More than 90 Countries Worldwide.*
Accounting Firms Examined More Closely
● KPMG LLP● PricewaterhouseCoopers LLP ● BDO Seidman LLP
● Deloitte LLP● Ernst & Young LLP● Grant Thornton LLP
The Global SixThe Global Six
* Source: “Which Audit Firms are Accepted by Wall Street?A Reference Guide by Capital Markets Advisory Partners, 2009, Version 1.0
I
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NVCA Promoting Alternate Ecosystem Partners
Investment Banks● NVCA Organizing Workshops
With Boutique Banks and Large I-Banks to Identify and Address Needs of Emerging Growth Companies
Accounting Firms● NVCA Meeting with “Global Six”
Accounting Firms to Discuss Needs of VC-backed Companies and Ways To Provide Better Worldwide Support
FacilitateFacilitate
EncourageEncourage
● NVCA Encourages Joint Book Running (Major Bank and Boutique Bank Partnership) with Fee Sharing as a Desirable Practice
● NVCA Encourages Obtaining Bids From Global Six and Non-Global Six Accounting Firms as Desirable Practice in IPO Planning
NVCA Actions Can Create More Competitive EcosystemNVCA Actions Can Create More Competitive Ecosystem
I
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Other Ecosystem Partner RecommendationsI
● 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
16
NVCA Plan: Pillar II – Enhanced Liquidity Paths
Job Creation
IEcosystem
Partners
IIEnhanced Liquidity
Paths
IIITax
Incentives
IVRegulation
VC Industry U.S. Government
Innovation
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Current Liquidity Mechanisms
Distribution System Is BrokenDistribution System Is Broken
● Too Many Companies Below Critical Mass
● Too Few Transformative Companies
SellersSellers(Portfolio Companies)(Portfolio Companies)
PublicPublicMarket BuyersMarket Buyers
(Institutional/Strategic)(Institutional/Strategic)
● Public Market Jitters● Short Selling Increases
Market Volatility● Minimum Bite Size● Due Diligence Burden
II
● Restricted Analyst and I-Banker Collaboration
● Undergoing Massive Organizational Changes
Current I-BanksCurrent I-Banks
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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
II
19
Enhanced Liquidity Mechanisms – Example
● Access to Long-Term Investors
● Accelerated Fund Raising
SellersSellers(Portfolio Companies)(Portfolio Companies)
PublicPublicMarket BuyersMarket Buyers
(Institutional/Strategic)(Institutional/Strategic)
● Pre-Screened Deal Flow● Efficient Due Diligence● Increased Visibility
New Platforms Will Increase VC Ecosystem LiquidityNew Platforms Will Increase VC Ecosystem Liquidity
● VC-Backed Private Market Platform● Enforced Membership Criteria
– Last Round of Financing $20-200MM– Seeking to Go Public in 6-18 Months
● In-House Vetting Process,Including Company Information Portal, Conferences
New Liquidity PlatformsNew Liquidity Platforms
II
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NVCA Enhanced Liquidity Mechanism Recommendations
• Venture Firms Encouraged to Pro-actively Explore M&A Roll-Up of Smaller Portfolio Companies to Achieve IPO Critical Mass
III. Pro-Active M&AIII. Pro-Active M&A
• Venture Firms Encouraged to Use Enhanced Liquidity Mechanisms Such as InsideVenture and Others
I. Liquidity PlatformsI. Liquidity Platforms
• Raise Rounds From Global Financing Sources
• Explore Global M&A• Explore IPOs on Intl.
Stock Exchanges• Consider Longer Lock-
Ups to Increase Demand for Venture-Backed IPOs
II. Portfolio CompaniesII. Portfolio Companies
II
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NVCA Plan: Pillar III – Tax Incentives
Job Creation
IEcosystem
Partners
IIEnhanced Liquidity
Paths
IIITax
Incentives
IVRegulation
VC Industry U.S. Government
Innovation
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NewNew
● Adopt New Tax Incentive to Stimulate IPOs
– One Time Only
– 10% Capital Gains Tax Rate for IPO Purchaser and Investors
– Only Applicable for Holding Periods > 2-3 Years
● Consider a Longer Holding Period for Long-Term Capital Gains
Special IPO Program Will Increase Government Revenues
NVCA Pro-Growth Taxation RecommendationsIII
PreservePreserve
● Keep Long-Term Capital Gains Tax Rate Globally Competitive
● Preserve Meaningful Differential Between Ordinary Income andLong-Term Capital Gains Tax Rates
● Promote Tax Incentives for Venture Capital Investments of Certain Types and Sizes (e.g. Cleantech, Life Sciences)
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NVCA Plan: Pillar IV – Regulation
Job Creation
IEcosystem
Partners
IIEnhanced Liquidity
Paths
IIITax
Incentives
IVRegulation
VC Industry U.S. Government
Innovation
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Barriers to Going Public on U.S. Stock Exchanges
Exit Route Preferenceand Expectation
(n=108)
Top 3 Barriers to Going Public# of Responses Answered as a Top 3 Issue
(Participants = 108)
M&A
IPO
Compliance Requirements (Sarbanes-Oxley, Audit, Governance)
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)
Higher Perceived Litigation Risk from U.S. Investor Base
Other
Source: DCM Analysis/Survey of Venture-Backed Companies, 2009
Current Regulation Has a Major Impact on How Current Regulation Has a Major Impact on How Emerging Companies Consider their Exit RouteEmerging Companies Consider their Exit Route
IV
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● Reduce Fraud● Restore Confidence
● Eliminate I-Bank Conflict of Interest
● Equal Information Access for All Investors
● Faster Development of Private Placements
● Prohibitively Expensive for Small Companies● Extended Time to IPO● M&A More Attractive
● Sell Side Analyst Exodus● Reduced Analyst Coverage and
Aftermarket Support
● Communication Gap Grows Between Small Caps and Potential Buyers
● Restrictions Limit Usefulness
Original Intent Unintended ImpactRegulations
Uncoordinated Regulations Severely Harm Small Companies
SarbanesSarbanesOxleyOxley
““Spitzer Spitzer Decree”Decree”
Reg. FairReg. FairDisclosureDisclosure
Rule 144ARule 144A
Regulations Need Updating to Eliminate Regulations Need Updating to Eliminate Unintended ConsequencesUnintended Consequences
IV
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Pre-IPOPre-IPO Post-IPOPost-IPO Private PlacementPrivate Placement
NVCA Recommendations for Regulatory Changes
• Permit À La Carte Disclosure System
• Permit Confidential Registration Filings
• Phase in SOX 404 Requirement For Small Companies
• Permit Research Analysts to Better Collaborate with Both the Issuer and Investment Bankers During the IPO Process
• Relax Financial Statement Requirements
• Suspend Minimum Market Cap Requirements
• Prohibit Short Sales of Newly Issued Company Shares for at Least 12 Months
• Expand Usage of Form S-3 to Enable Offerings Beginning 90 Days Post IPO
• Eliminate Restrictions on Use ofS-3 for Certain Primary Offerings of Non-accelerated Filers
• Revise Requirement for Obtaining Shareholder Approval to Sell Securities Below Market or Book Value
• Educate CFOs on Reg FD Restrictions and Allowances
• 144A – Expand Definitions of Qualified Institutional Buyers
• 144A – Relax Requisite Holding Periods and Volume Restrictions
• NASDAQ/Portal Alliance – Open It Up to Private Companies and Accredited Investors
NVCA Requests Full SEC Review of Recent Laws NVCA Requests Full SEC Review of Recent Laws to Streamline Small Company IPO Processto Streamline Small Company IPO Process
IV
27
NVCA 4-Pillar Plan Summary
Job Creation
IEcosystem
Partners
IIEnhanced Liquidity
Paths
IIITax
Incentives
IVRegulation
VC Industry U.S. Government
Innovation
• Adopt New Tax Incentive to Stimulate IPOs: One Time Only
• Keep Long-Term Capital Gains Rate Competitive• Promote Tax Credits for VC Investments of Certain
Types/Sizes (e.g. Cleantech)• Consider Longer Holding Period for Long-Term capital Gains
• Use New Platforms for Linking Buyers and Sellers (Like InsideVenture)
• Encourage Use of Global Funding Sources for New Rounds, M&A and IPOs
• Utilize Pro-Active M&A to Achieve Critical Mass
• Request Full SEC Regulatory Review to Streamline Small Company IPO Process
• Eliminate Harmful Spitzer Settlement Provisions
• Relax SOX 404 Compliance Restrictions and Permit Optional Extended Lock-ups
• Expand usability of NASDAQ PORTAL Alliance to private companies and accredited investors
• Stimulate Ecosystem Competition : I-banks (Majors/Boutiques), Law Firms, Acctg. Firms (Global Six - Lower Costs)
• Encouraging Joint Book Running with Shared Economics
• Cultivate New Buyers / Funds for IPOs
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NVCA Expresses Its Appreciation● The NVCA Board of Directors● Hassan Ahmad, Sonus Networks ● Mike Brooks, Venrock● Stuart Cable, Goodwin Procter● James L. Callinan, RS Investments● Frank Currie, Partner, Davis Polk & Wardwell● Scott Cutler, NYSE Euronext ● Ash Dahod, Starent Networks● Mona DeFrawi, InsideVenture● Paul Deninger, Jefferies & Co. ● Susan Page Estes, Global VC Coverage, UBS
AG● Irwin Federman, USVP● Leslie Wolff Golden, Ridgewood Capital● Bob Grady, The Carlyle Group● Bill Hambrecht, W.R. Hambrecht + Co.● Felda Hardymon, Harvard Business School
● Harry W. Kellogg, Jr., Silicon Valley Bank● Stan Lapidus, Helicos ● Bob McCooey NASDAQ● Michael Millman, JP Morgan● Chuck Newhall, NEA● Duncan Niederauer, NYSE Euronext ● Sandy Robertson, Robertson Stephens● James D. Robinson III, RRE Ventures● Bill Schnoor, Goodwin Procter● Antoinette Schoar, MIT ● Larry Sonsini, Wilson Sonsini Goodrich & Rosati ● David Topper, JP Morgan ● Brian Truesdale, Deutsche Bank● David Weild, Markets Advisory Partners● Thom Weisel, Thomas Weisel Partners ● Rian Wren, Neutral Tandem
Thanks to DCM, Highland Capital Partners, the NYSE Thanks to DCM, Highland Capital Partners, the NYSE and Wilson Sonsini for their generosity in hosting the and Wilson Sonsini for their generosity in hosting the
Blue Ribbon dinnersBlue Ribbon dinners
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Thank You