Let's not crimp VC's style

Tom Still

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If you were to design a system to encourage investment in small, high-growth companies, the kind that have produced a disproportionate number of American jobs, would you:

• Invest less in academic research and development, which has a track record of producing commercially valuable innovation?

• Overwork the patent system to the point that it becomes cumbersome and even unresponsive?

• Pass laws that encourage up-and-coming companies to look offshore for investors, or that make it harder for those companies to be listed on a stock market, such as the Nasdaq, when the time is right?

• Make it harder to find and attract employees skilled in math, science and engineering?

Unless you harbored a death wish for 21st century capitalism, you wouldn't do any of the above - at least, not deliberately. However, a leading spokesman for America's venture capital industry warns that these trends are combining to threaten the future of high-risk investments in U.S. companies.

Mark Heesen, president of the National Venture Capital Association, spoke recently at the Wisconsin Entrepreneurs' Conference in Milwaukee and delivered a generally upbeat assessment of venture capital today, including some signs that Wisconsin may be losing its VC "flyover" status, but closed on a cautionary note.

"We think this period is the best or one of the best in the history of the venture capital industry," Heesen said, but a combination of regulatory, financial and even political trends could crimp VC investment in the near future.

Those trends include regulations that have slowed capital formation in some sectors or made it harder for entrepreneurs to climb the investment ladder. The Sarbanes-Oxley Act reforms, designed to check the excesses of the Enron era, are discouraging companies to get in line for the process of "going public." Public companies have created much of America's wealth and jobs over time, Heesen noted, so the goal should be to "assure integrity of financial reporting" without crushing initial public offerings under a mountain of regulation.

For venture investors to cash out of their investments, there must be an "exit strategy." That could be a merger with another company or an acquisition. But public markets such as Nasdaq continue to be the preferred exit, because they allow continued company growth and strong returns on the initial investment.

New regulations also mean entrepreneurs have fewer "team-building tools," such as the freedom to issue stock options, as they grow their companies. "Options granted declined 50 percent over the last five years," Heesen noted. "Rank-and-file workers are severely impacted."

Concerns about protecting intellectual property have sparked proposals to reform U.S. patent laws and the Patent and Trade Office itself, but Heesen said his group wants to ensure that "quick fixes don't harm innovation."

Heesen said government funding for core academic R&D, competitive, universal education and smart immigration policies are needed to ensure that the flow of ideas and trained people continue to grow.

The NVCA's new competitiveness agenda, called Maximizing America's Growth for the Nation's Entrepreneurs and Technologists, stresses four points: Reforming and improving education, attracting and retaining talent, investing in basic R&D and ensuring access to growth capital.

The people at NVCA are profit-oriented and focused on America's future. It's worth listening.

Tom Still is president of the Wisconsin Technology Council.

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