Capital Formation

Issue Overview

The venture capital community is committed to funding America’s most innovative entrepreneurs and working closely with them to transform breakthrough ideas into new companies and industries that drive U.S. job creation and economic growth. From seed funding to successful business, accessing capital is the lifeblood to realizing the power of disruptive ideas.

In order to scale an enterprise so that it has truly global market capability, promising companies need efficient and timely access to capital, which often times is more than their venture investors alone can provide. It’s at this point that accessing additional capital—either through M&A or an initial public offering (IPO)—becomes critical to the continued growth of a company.

Of these two exit options, a successful IPO provides some important advantages over a merger or acquisition. Because an IPO typically can raise more capital for hiring, product development and expanded distribution, it has the potential to transform regional economies and communities in significant ways. Additionally, an IPO typically generates meaningful returns for pension funds, endowments, foundations and other limited partners, and enables all types of investors to participate directly in the company’s growth.

In the last decade, however, the market for venture-backed IPOs saw a steep decline. From 1990 to 1996, more than 1,200 U.S. venture-backed companies went public on U.S. exchanges, yet from 2004 to 2010, only 324 did so. This dramatic decline can be attributed to a complex series of changes in the regulatory environment and related market practices over the last two decades that have driven up costs and uncertainty for emerging growth companies looking to go public.

Recognizing this, Congress recently enacted the Jumpstart Our Business Startups (JOBS) Act to address the risks, costs and regulatory burdens faced by startup companies fighting to succeed. More work remains to implement the law as well as advance other measures to make the pathway to the public markets for small companies easier to access and navigate. Additionally, more needs to be done to mitigate some of the challenges small companies face in the markets post-IPO. While the JOBS act has reopened and smoothed the road to the public market for emerging growth companies, the public market remains a very difficult place to grow a company due to liquidity issues facing small cap stocks.

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