Last week the House and senate passed bipartisan legislation called the Jumpstart Our Business Startups Act that will help jumpstart the United States economy. The U.S. venture capital industry has been in decline for the past ten years and this legislation will be important in reinvigorating American innovation and increasing business startups.
The current lackluster state of American venture capitalism is shown in the real dollar amounts limited partners in the industry have raised. In 2010 the industry raised only 44 percent of what the industry raised in 2001. These declining numbers are hampering economic growth and employment in the U.S. According to some estimates, venture capital-backed companies produce 11 percent of private sector employment and 21 percent of U.S. Gross Domestic production, even though they account for less the 0.2 percent of all businesses.
Poor financial returns on investments lead venture capitalist to look at other asset classes, which it has been doing in droves. Venture capitalists make money when a business they invest in is either sold or goes public. The difference in today's venture capital industry is a regulatory environment that makes it much more difficult and costly than it used to be to take companies public through the initial public offering process. Historically, the IPO process has been more lucrative to investors than acquisition evaluations were.
Thanks to fraud conducted by companies like Worldcom and Enron, in 2002 Congress passed the Sarbanes-Oxley Act which increased the standards for financial disclosures required by public companies. Many venture capital-backed companies suffered huge financial setbacks from the new regulation by making it more difficult to issue IPOs and increasing the costs of taking a company public.
Finding venture capital in today's cautious investment environment can be difficult if you have a great business idea and require a little seed money to get it off the ground. Consulting with a venture capital attorney experienced in locating the right investors for various business opportunities can be the first step towards getting your idea off the ground.
The new JOBS Act will allow new startup companies that go public a five-year period in which it can comply with the Sarbanes-Oxley Act's accounting and compliance standards. This legislation will encourage more venture capital-backed startups to issue IPOs, improving the financial performance of venture capital firms and ultimately drive more investments into high growth businesses, ultimately creating more jobs and economic growth.
Source: The American, "Getting Venture Capital Back on Track," Scott Shane, March 30, 2012