The Maker Movement Manifesto by Mark Hatch

Author:Mark Hatch
Language: eng
Format: epub
Publisher: McGraw-Hill Education
Published: 2014-08-29T04:00:00+00:00

THE FUTURE OF VENTURE CAPITAL

The current system of venture capital first developed in the 1960s has evolved into a focus on home runs. This is to some extent driven by the boom and bust nature of the businesses companies are in, the IPO market cycles or “window” as it’s called, but to a significant extent it has been the result of a series of actions taken by Congress and the SEC (Securities and Exchange Commission) to reduce fraud perpetuated by Enron and other scandals. The 2002 Sarbanes-Oxley Act’s rules for auditing added over $1 million in annual costs for even small firms to comply. As a by-product of our fears related to fraud, we have managed to utterly destroy the IPO market for companies under $50 million in sales. “Destroy” is not too strong a term. There has been a 90 percent reduction in the number of these IPOs in the last couple of decades.3 How would you feel if you lost 92 percent of your food? The U.S. regulatory regime has basically been doing that to the American economy—starving it.

According to a Kauffmann study, all of the new jobs in the U.S. economy were produced by start-ups in the last few decades. They call them gazelles, very fast start-ups growing quickly. Corporate America sheds jobs, merges and cuts jobs, automates and eliminates jobs, and the new jobs net are created by start-ups. And we had made it almost impossible to fund smallish, interesting start-ups because one of the key sources of funding, venture capital, couldn’t get small exits. They have been forced to swing for the fences. Basically, if a group can’t tell a VC (venture capital) or angel group with a straight face that its idea could be a $1 billion exit, they aren’t very interested in it. Even if you show a VC or angel group a $100-million-a-year market that, if everything works out, you could dominate, it will pass. It’s too risky, and the only exit is through a private equity firm or acquisition.

That changed in 2012. With the passage of the JOBS Act, Sarbanes-Oxley was waived for smaller firms. This has yet to play out with the venture capital firms, but there is now room for multiple investments where the strategy is small hits instead of home runs. Exits are in the $50 million to $100 million range. It will take more deals and a different process, but this is a potential sea change. And that’s nothing compared to the potential tsunami coming from the illumination of advertising for securities.

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