Friday, July 17, 2009

Beleaguered venture capital industry strikes back

On July 15th Trevor Loy, who runs a $40 mm venture capital fund called Flywheel Ventures, testified before the Senate Banking Subcommittee on Securities, Insurance and Investment Hearing. The testimony was in reference to the proposed SEC Registration Requirements we discussed in the previous post.

The testimony is embedded below, but here is the key quote:
By requiring venture funds to register with the SEC under the Advisers Act, the administrative burden on the firm and the CFO would grow exponentially. In addition to filing information regarding the identification of the firm, its partners and assets under management, the Advisers Act establishes a number of substantive requirements that would change the operation of a venture fund and the relationship between the venture fund and its limited partners. Many of these requirements, which are summarized below, would demand significant resources and overhead which sophisticated investors have not requested and venture funds currently do not have in place.

This proposed legislation could not have come at a worst time for the venture capital industry. From the National Venture Capital Association (NVCA):
Just 25 venture capital funds raised $1.7 billion in the second quarter of 2009, according to Thomson Reuters and the National Venture Capital Association (NVCA). This level represents the smallest number of venture funds raising money in a single quarter since the third quarter of 1996 (21 funds) and the lowest level of dollars committed since the first quarter of 2003 when $938.1 million was raised.
The chart below shows the fund raising trend in the last 9 quarters.



This blunt force registration requirement may be the last straw for a number of managers who just may close shop. The last thing that the US economy needs right now is reduced capital flow for start-ups and innovation. The administration and Congress should keep in mind that Google, eBay, and Amazon all started with venture backing.