Pascal's View

A Wake-Up Call for America– Free Webcast Discusses Systemic Market Failure in U.S. Equities and Formal Release of New Grant Thornton Study, November 9th 12:30 PM EST

2009-11-05T05:19:45Z

Join Grant Thornton for a free Webcast on A Wake-Up Call for America, the greatly anticipated study demonstrating how market structure changes over the past 10 years have had a profound negative effect on the number of publicly listed companies in the United States – ultimately inhibiting economic recovery, worsening the job market and undermining U.S. competitiveness.

Date: Monday, November 9, 2009

Time: 12:30-2:00 EST

Note: Register now, Company pass code – 710004, Course code – 11738

The Webcast will feature a lively discussion among the study’s contributors and other industry-leading capital markets executives, and will include an in-depth look at the steep decline in U.S. listings, the macroeconomic implications, and recommendations for attainable solutions. A Q&A session will conclude the event, and all participants will receive a copy of the study.

Participants include:

David Weild – Former vice-chairman and executive vice president of the NASDAQ Stock Market, and current Senior Advisor at Grant Thornton LLP and founder of Capital Markets Advisory Partners.
Edward Kim - Former head of product development at the NASDAQ Stock Market, and current Senior Advisor at Grant Thornton LLP and Managing Director of Capital Markets Advisory Partners.
Pascal Levensohn – Founder and Managing Partner of Levensohn Venture Partners, and Director of the National Venture Capital Association (NVCA), where he is chairman of the education committee.
Barry Silbert – Founder and CEO of SecondMarket, the largest marketplace for illiquid securities. SecondMarket was named the top start-up in the entire Northeast by AlwaysOn Media and one of the Top Fifty Startups You Should Know by Businessweek.

Space is limited. Register today. <http://university.learnlivetech.com/gtt>

Follow the steps below to register. You will receive an email confirmation with instructions for attending the Webcast. If you need assistance with registering, please call 206.812.4700.

Go to http://university.learnlivetech.com/gtt and choose “New Student Registration” to create your account, then enter company pass code 710004.
If you have attended a Grant Thornton Webcast within the past year, simply log in to your account.

Locate the Webcast in the catalog and sign up for A Wake-up Call for America, course number 11738.

Financial Times Reports on U.S. Market Structure Failing to Support Small Cap Companies

2009-11-01T02:36:17Z

Aline van Duyn of The Financial Times reports that the U.S. listed capital markets have been in systemic decline for many years, quoting the forthcoming Grant Thornton study which will be released November 9th:

The analysis finds that the number of US exchange-listed companies is down by more than 22 per cent since 1991 and down by 53 per cent when allowing for real, inflation-adjusted gross domestic product growth.

In Asia, growth in listed companies is increasing faster than the GDP growth rate, and the pace far exceeds that of the US.

“This [decline] is not a global phenomenon; the US is seriously lagging other industrialised nations in the formation of such listed companies,” the report says.

The analysis, which has been in the works for more than six months, argues that the structure of the US financial markets is no longer configured to support the capital raising activities of small start-ups.

To read the full article CLICK HERE

U.S. Senator Edward Kaufman– Market Structure at the Root of U.S. Equity Crisis

2009-10-23T03:11:49Z

United States Senator Edward Kauffman (D) Delaware wrote a very important opinion piece in last Friday’s Financial Times, shining a light on the opaque technical trading regulations which are the root cause of the IPO drought in the United States, threatening the integrity of our markets and putting at risk an entire generation of innovators. Senator Kaufman’s article is insightful, concise, and clear. I applaud his important leadership in this complex and critical area.

For a link to the article, click HERE.

I have re-printed it in its entirety and urge you to read it below:

Preventing a horror movie ending in the US markets
By Edward E. Kaufman

High frequency trading, dark pools, and flash orders – unknown to most Americans a few short months ago – have now joined the American lexicon. As phrases, they are easily tossed about. But trying to understand the arcane, high-tech and labyrinthine way stocks are traded – radically transformed from just a few years ago – is far more difficult.

Many on Wall Street assure us there is nothing to worry about. In their view, the dramatic proliferation of competing markets and the extraordinary rise in high velocity trading have had only beneficial results: greater liquidity, narrowed spreads and lower transaction costs for all investors.

Lost in this reflexive defense against meaningful government review, however, is a more overarching concern: the integrity of our capital markets, which are now too fragmented, too opaque and well beyond the effective surveillance of the Securities and Exchange Commission.

That’s why I have urged the SEC to undertake a comprehensive “ground up” review of a broad range of market structure issues before more piecemeal changes occur. We have seen this horror movie before, and only timely regulatory examination can best prevent a sequel: When markets develop rapidly and are not transparent, effectively regulated or fair, the movie’s ending scene can be one of tragedy affecting millions of people.

The facts speak for themselves. We’ve gone from too few stock markets to too many; from an era dominated by a duopoly of the New York Stock Exchange and Nasdaq to a highly fragmented market of more than 60 trading centres.

In competing for market share, those trading centres encourage or permit a variety of questionable practices. Dark pools, for example, which allow confidential trading that takes place away from the public eye, have flourished: Five years ago, there were 18 dark pools comprising 1.5 per cent of the market’s volume; today, over 50 dark pools execute over 12 per cent of market trades. And the total percentage of trades taking place in dark pools or internally at broker dealers, another source of private trading outside public markets, now approaches one quarter. For strictly retail investor orders, it may be twice that amount.

Moreover, in just two years, the percentage of daily stock trading volume by high frequency traders – whose computers are constantly probing the market for miniscule price advantages — has reportedly skyrocketed from 30 percent to nearly three out of every four trades.

Left unchecked, high frequency trading could develop into a systemic risk, becoming simply too big and too fast to regulate. If all the machines “zig” at the same moment when they should have “zagged”, market chaos could ensue.

And when the average investor loses confidence in the integrity of our markets, when he or she believes that the price at which they are able to buy 100 shares of IBM is higher than it should be, even if only marginally, because of high frequency gaming strategies, then the reputation of our capital markets for basic fairness is significantly tarnished.

The SEC’s review should be all-encompassing, reviving old ideas and examining new ones: should markets be centralised or decentralised; should we separate the markets based on investor types; what should be the role of market makers; what role might there be for real time risk management?

At a minimum, a few simple themes should guide us to a regulatory framework that permits vigorous competition while substantially reducing the possibility of a two-tiered trading network, where long-term investors are vulnerable to powerful trading companies that exist not to value or invest in the underlying companies, but to feed everywhere on small but statistically significant price differentials.

First, we should reconsider the criteria for becoming an exchange or market centre because the market’s unhealthy fragmentation – and the high-speed trading strategies that thrive on it – are growing rapidly.

Second, we should consider rule changes that ensure the best prices are publicly available, not hidden from view in private trades. The strength of a free market is based on this public display. Accordingly, we should reduce “internalisation” (by insisting on meaningful price improvement in comparison to the public quotes or by granting the public quotes the right to trade first) and trading in dark pools (by reducing the permissible threshold for dark trading and defining indications of interest, and other quote-like trading signals, as quotes).

Third, we should root out conflicts of interest by ending payments from market centres that encourage orders to flow their way. The search for best execution by broker-dealers should not be subject to temptation from the highest bidders. Competition for market share includes liquidity rebates and direct access for hedge funds, which also deserves careful review.

Fourth, until regulators can measure execution fairness in milliseconds for stock trades of all kinds, the credibility of the markets cannot be assured. The audit trails and records of order execution in fragmented venues must be synchronised to the millisecond and made readily available in statistically understandable formats to the regulators and the public. Currently, while high frequency traders bank profits in milliseconds, the first column for time on the Rule 605 form, used by regulators to measure execution quality, reads “0-9 seconds.”

Fifth, regulators must also develop more sophisticated statistical tests, such as following volume patterns to gain a granular view of gaming strategies. Only then can regulators separate high frequency strategies that add value to the marketplace from those that inexcusably take value away.

As a nation, our credit and equity markets should be a crown jewel. Only a year ago, we suffered a credit market debacle that led to devastating consequences for millions of Americans. While we must redress those problems, we must also urgently examine opaque and complex financial practices in other markets, including equities, before new problems arise. It is essential to ensure the integrity of US capital markets.

Edward E. Kaufman is a Democratic senator for the state of Delaware

Bloomberg TV: Understanding Why Decimalization in the U.S. Disproportionately Hurts Small Cap Stocks

2009-10-10T14:07:59Z

Decimalization, quoting stock prices in decimals instead of fractions, isn’t a problem in and of itself. The problem results from turning a market spread that used to be $0.25, for example, into 25 1-penny increments because it takes the positive economics out of trading that stock for market makers who are supporting relatively unknown emerging growth small cap companies. Why does this matter? Because if you can’t make money risking your capital by providing liquidity for others, you won’t. This change to decimalization occurred in 2001. Combined with New Order Handling rules originally passed in September 1996 and implemented in 1997, these modifications to technical trading rules fundamentally changed how then-emerging electronic trading networks (ECN’s), such as Instinet, could buy and and sell stocks. In short, ECN’s could transact within the market maker’s spread and force the market maker to execute at the ECN’s order price. The problem with this, again, is that it caused market makers to lose money, so they stopped marking markets in stocks where they would lose money. Simple enough, but the unintended consequences of well-intended regulations have had the severely negative impact on our economy of gutting liquidity and research support for small cap stocks. As a result, small companies that are otherwise worthy of going public cannot access the public markets because they cannot support a large enough underwriting to attract large cap investors. This is why the underwriting criteria for IPOs today require companies to have $100mm plus in revenues, have a multi-year history of positive cashflow generation, and be profitable on a GAAP basis, at a minimum, in order to raise sufficient capital to generate sufficient after-market liquidity for underwriters to take on the new listing. The losers are the next generation of innovative companies and the entrepreneurs who lead them– today’s version of Intel, Dell, EA, Applied Materials, Symantec, Oracle, and many other well-known companies who could not meet today’s IPO criteria but did successfully go public and grow into industry giants through IPO’s completed before 1997. Watch this Bloomberg TV video, featuring David Weild, which tells the story. CLICK HERE FOR VIDEO LINK

New Study: Market Structure is Causing the IPO Crisis

2009-10-06T15:29:15Z

I’ve been speaking publicly for over one year about the disastrous impact of the capital markets crisis in accelerating the demise of small emerging company IPO’s. To be clear, this process began over eleven years ago and, in my view, it is the single most important issue for the venture capital community because it jeopardizes an entire generation of innovative American companies. In addition to revitalizing America’s slipping global competitiveness, restoring emerging company IPOs in the U.S. will efficiently create new jobs and drive a new, sustainable economic growth cycle in our country.

Grant Thornton LLP’s Capital Markets Group today announced the release of Market Structure is Causing the IPO Crisis, a white paper examining the demise of initial public offerings in the United States, and offering remedies to resurrect the IPO market. The paper is a follow up to Grant Thornton’s original study, Why are IPOs in the ICU?, which was published in November 2008.

The new white paper provides fresh market data and incorporates additional insight gleaned from discussions with a wide range of key market participants, including former senior staffers at the SEC and senior executives at “bulge bracket” and “major bracket” investment banks.

Co-authored by David Weild, Senior Advisor at Grant Thornton, founder of Capital Markets Advisory Partners and former NASDAQ vice-chairman, and Grant Thornton Senior Advisor Edward Kim, the updated study continues to focus on how technological, regulatory and legislative changes have combined to chisel away at the U.S. IPO market. Although conventional wisdom holds that the U.S. IPO market has been going through a cyclical downturn exacerbated by the recent credit crisis, the paper points out that in reality, the market for underwritten IPOs, given its current structure, is closed to 80% of the companies that need it.

“Despite the recent uptick in IPO activity, over the last several years, initial public offerings in U.S. have nearly disappeared,” noted Mr. Weild. “Our findings since publication of the original white paper have served to reinforce our thesis that the loss of the IPO market in the United States is due largely to changes in market structure. By killing the IPO goose that laid the golden egg of U.S. economic growth, the combination of technology, legislation and regulation undermined investment in small cap stocks, drove speculation and killed the best IPO market on earth.”

The white paper proposes a solution to this crisis – an issuer and investor opt-in capital market that would make use of full SEC oversight and disclosure, and could be run as a separate segment of NYSE or NASDAQ, or as a new market entrant. It would offer:

Opt-in/Freedom of Choice – Issuers would have the freedom to choose whether to list in the alternative marketplace or in the traditional marketplace.
Public – Unlike the 144A market, this market would be open to all investors.
Regulated – The market would be subject to the same SEC corporate disclosure, oversight and enforcement as existing markets.
Quote driven – The market would be a telephone market supported by market makers or specialists, much like the markets of a decade ago.
Minimum quote increments (spreads) at 10 cents and 20 cents and minimum commissions – 10-cent increments for stocks under $5.00 per share, and 20 cents for stocks $5.00 per share and greater, as opposed to today’s penny spread market. These measures would bring sales support back to stocks and provide economics to support equity research independent of investment banking.
Broker intermediated – Investors could not execute direct electronic trades in this market; buying stock would require a call or electronic indication to a brokerage firm, thereby discouraging day-traders from this market.
Research requirement – Firms making markets in these securities would be required to provide equity research coverage that meets minimum standards.

To view the full paper including updates, please visit: www.gt.com/ipo.

Full Text of Keynote Remarks at Renewable Energy Finance Forum Conference

2009-10-02T04:01:46Z

I’ve posted the text of my prepared remarks integrated with the PowerPoint slides on the web and am proudly wearing my “wet blanket.” While many analysts of the impact that the capital markets crisis is having on emerging growth companies focus on describing the problem, I have added my voice in support of a group of capital markets experts who are proactively offering concrete and realistic solutions to the problem. More to follow…

CLICK HEREto access the pdf.

I invite comments from others who feel that the capital markets are in need of systemic reform and have actionable recommendations to restore the job creating engine that is the small company IPO.

ACORE REFF West Conference Keynote Abstract, September 30

2009-09-27T13:58:22Z

This coming Wednesday I will be speaking at the REFF West conference in San Francisco about the capital markets crisis and its impact on American innovation. Given the recent upwelling of popular press articles heralding the return of IPOs, my views, which are supported by newly released long-term statistics,are likely to generate some discussion. An abstract of my remarks follows:

The capital markets crisis has put an entire generation of American emerging growth companies at risk. America’s traditional leadership in entrepreneurial growth and innovation is now visibly faltering. This is the result of decades of government and corporate emphasis on short-term development at the expense of funding long-term, basic breakthrough research. Our nation’s lawmakers do not broadly recognize the public policy agenda implications of the fact that technology innovation has gone global. Recently published comparative international economic data reveals long-term declining rates of growth in U.S. government, corporate, and academic Research & Development (R&D) spending, particularly in Information Technology (IT). Further, a new study of the global capital markets illustrates the steep decline of the U.S. global share of public company listings for over a decade while other global stock exchanges have grown and flourished. All of these signs point to America’s slipping global competitiveness.

The global financial crisis has drained risk capital from the private sector at the worst possible time, compounding the effect of decades of neglect of our nation’s IT R&D infrastructure. Of direct consequence to the emerging Cleantech industry, the continuing IPO drought is a symptom of a deeper systemic liquidity crisis for small capitalization companies.

Predictions that U.S. IPOs are about to come back in a meaningful manner are wishful thinking. The current threshold criteria for liquidity as defined by the dominant underwriters in the U.S. accommodate only a small minority of the viable private companies seeking public growth capital. The severity of this untenable situation is compounded by a lack of awareness among our nation’s policymakers that all of these factors are interrelated (the announcement by the White House of an American Innovation Strategy last Monday notwithstanding).

It is not too late to address these challenges with realistic, achievable solutions that will enable structural capital markets reform. We must take specific actions to reverse the unintended consequences of a series of securities regulations bolted onto a framework that has been eclipsed by electronic trading and increasingly left behind in a fundamentally transformed global competitive environment. We must also recognize that, just as we nurture our startups in the unique environment of Silicon Valley, we must provide a public market structure that nurtures our fledgling IPOs and that allows middle market underwriters to support these companies with sufficient liquidity and with thorough, responsible research coverage.

Achieving these goals in the public equity markets does not require the relaxation of Sarbanes Oxley or of other recently implemented measures of corporate governance oversight and director accountability. To respond effectively, however, our legislators and regulators must share a sense of urgency to develop a coherent national innovation agenda that acknowledges new capital formation and new job creation through IPOs as top national priorities.

Business Week Report on “Radical Future of R&D” Misses Critical Capital Markets Link in Innovation Ecosystem

2009-09-08T03:15:42Z

The cover story of the September 7 issue of Business Week reports on the “Radical Future of R&D“, focusing on the internationalization of research and development led by global corporations such as IBM and Hewlett Packard. The magazine includes a story written by Adrian Slywotzky, “How Science Can Create Millions of New Jobs.” Mr. Slywotzky is an “author of several books on profitability and growth” and currently a partner at the management consulting firm Oliver Wyman. While the article makes important points about the sorry state of the American R&D ecosystem, the author neglects to mention that, in order to achieve the goal of new job creation, healthy U.S. capital markets are essential and intimately linked to new funding commitments to basic scientific research.

The article cites the extraordinary decline of Bell Labs over several decades as an example of the model that we must seek to restore, and he makes other basic points about the decline in our nation’s R&D efforts. These valid observations may be drawn from primary research sources such as the work published by the National Academies, whose most recent report, Assessing the Impact of Changes in the Information Technology R&D Ecosystem: Retaining Leadership in an Increasingly Global Environment, was released several months ago. The article points to America’s innovation crisis along lines that have been articulated in greater detail by thought leaders including Judy Estrin and Norm Augustine.

Unfortunately, Mr. Slywotzky makes an important assertion about venture capital that is incorrect. I believe that, if he understood the reality of the venture capital industry today and its inextricable link to the Initial Public Offering (IPO) drought, his otherwise well-written article would have taken a markedly different direction. Below, I quote several parts of the article that I found particularly useful, and I point out the error:

First, the positive:

“America needs good jobs, soon. We need 6.7 million just to replace losses from the current recession, then an additonal 10 million to keep up with population growth and to spark demand over the next decade. In the 1990s the U.S. economy created a net 22 million jobs, or 2.2 million a year. But from 2000 to the end of 2007, the rate plunged to 900,000 a year. The pipeline is dry because the U.S. business model is broken. Our growth engine has run out of a key fuel– basic research.”

PASCAL’S COMMENT: Basic research is a key fuel, but, in fact, the part of the U.S. business model that drives job growth in emerging growth companies is IPOs. More on this below.

“It’s tempting to ascribe current job losses in the U.S. to the deep recessionor to outsourcing, but the root of the problem is the absence of high-value job creation.”

PASCAL’S COMMENT: Correct!

“… in recent years, outsourced software and manufacturing jobs have largely been replaced by millions of low-wage service jobs in fast-food, retail, and the like. . . . Of the roughly 130 million jobs in the U.S., only 20%, or 26 million, pay more than $60,000 a year. The other 80% pay an average of $33,000. That ratio is not a good foundation for a strong middle class and a prosperous society.”

PASCAL’S COMMENT: This is astounding and very bad news indeed.

Now, the mistake:

“Venture capitalists are sitting on plenty of cash and are good at bringing startups to the market. We just have to rebuild the upstream labs that focus on basic research– the headwaters for the whole innovation ecosystem.”

FULL STOP. First, the venture capital business is contracting severely:

From the April 18th, 2009 NVCA/PWC Moneytree report: “Venture capitalists invested just $3.0 billion in 549 deals in the first quarter of 2009, according to the MoneyTree™ Report from
PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA), based on data provided by Thomson Reuters. Quarterly investment activity was down 47 percent in dollars and 37 percent in deals from the fourth quarter of 2008 when $5.7 billion was invested in 866 deals. The quarter, which saw double digit declines in every major industry sector, marks the lowest venture investment level since 1997.” for more industry statistics, CLICK HERE

Second, it’s just not that simple. Mr. Slywotzky is ignoring the fact that over 90% of job growth from venture-backed companies occurs AFTER their IPO, and this has been the case since the 1970’s. We have an IPO drought that has killed the small IPO, and it is systemic, not cyclical. I have been speaking to this point publicly since March 2009.

A new study is going to be released in the next several weeks which will bring to light very important data about the long-term secular trend of declining public company listings in the U.S. Not only does this add tothe mountain of data showing America’s slipping global competitiveness, most importantly, the study develops a model establishing a direct relationship between this trend and American job losses. Publicly traded emerging growth companies are the most rapid job creation engine in America, and successfully harvesting the long-term economic growth fruits from basic scientific research is tethered to this post-IPO job creation engine.

To be clear, IPOs, particularly IPOs raising less than $50 million, have become largely extinct due to unintended consequences resulting from a series of securities regulations that followed the rise of electronic trading networks in 1996. The new capital markets study, which this blog will point to as soon as it is released, is written by David Weild and Edward Kim of CMA Partners. Weild and Kim are also the authors of the important white paper published last November by Grant Thornton, ‘Why Are IPOS in the ICU?’.

Yes, we need to restore the U.S. Government’s commitment to funding breakthrough innovation in basic scientific research. But we also need to take aggressive actions to protect critical elements of our nation’s innovation ecosystem and stop treating it as a series of loosely connected elements. Government research centers, university centers of research excellence, corporations, and venture capitalists are commonly bound to the most important element of this ecosystem, the entrepreneur. It is naive to believe that just promoting basic research will magically ripple though the innovation landscape and restore America’s lost greatness. Understanding the complexity of this issue requires interdisciplinary and unconventional thinking. It also requires an understanding of how capital markets actually work and applying real world solutions to resolve an urgent problem– the death of the small cap IPO.

Barron’s Article on Tech IPO’s Misses the Importance of the Extinct Sub-$50 million IPO

2009-08-23T00:14:28Z

On Monday, August 10, Barron’s ran a story “Does the IPO Market Shun Smaller Companies?”, written by Mark Veverka, asserting that “venture capitalists want to widen the playing field for the underwriters.” The story includes quotes from former National Venture Capital Association (NVCA) chairman Dixon Doll of DCM and investment banker Paul Deninger, who is the vice-chairman of Jefferies & Co. It accurately points out that, when it comes to IPOs, many venture capitalists have mistakenly defaulted to choosing the large investment banks (such as Goldman Sachs, Morgan Stanley, and Credit Suisse) as lead underwriters for their portfolio companies. This practice has created “a near oligopolistic hold on tech IPOs” by these large investment banks. Such market power allows bankers to shapes the profile of those companies worthy of going public to favor the natural demand from their largest clients: short-term trading focused hedge funds and large institutional investors that demand highly liquid public securities.

The collateral effect of this market reality is that the vast majority of emerging VC-backed companies are effectively barred from going public. To be clear, there are plenty of strong venture-backed companies today that should be public but that do not meet the valuation or liquidity criteria of the three large remaining investment banks (more on this below). Unfortunately, outside of the IPO-syndicate-bias and the much-maligned Sarbanes Oxley, the article does not address far more serious systemic regulatory consequences that further exacerbate the problem– such as the combined impact of decimalization and the Spitzer decree (taking trading commissions down from $0.125 per share to $0.01 or $0.02 per share and requiring that equity research be paid for by commissions ) which have effectively gutted both the after-market trading and research support that emerging company IPO’s need.

While the article notes that “the objective is to get back to late-80s, mid-90s practices, allowing more start-ups access to capital so they can remain indepenedne tand create more opportunities for venture capitalists to cash out”, the emphasis on who is cashing out is misplaced. More accurately stated, the institutional investors who fund the venture capital partnerships need more opportunities to cash out– and these institutions are largely public pension plans, college endowments, and other true long-term investing financial institutions. Why do they need to cash out? Because they are also the main players who have historically reinvested in the next generation of innovation.

Sadly, the article completely ignores the implications of this systemic liquidity crisis. If we look at the historic record, the most important point overlooked by this story is that smaller companies need to go public because they are the engines of growth that drive the U.S. economy– both in terms of job creation and GDP growth. The IPO chasm that exists today is the result of the death of the sub $50 million IPO. For a clear example, see the following list of 17 companies that went public and raised $50 million or less between 1971 and 1996:

These companies only raised $367 million in the public markets and they account for 470, 000 U.S. jobs today. Adjusted for inflation andmeasured in 2009 dollars, the $367mm in total dollars raised by this group equals$670mm, and only 2 of these 17 companies’ IPOs (EMC $80mm; and Oracle $70mm) exceed $55mm in 2009 dollars. While today these companies are household names, when they went publicthey were largely unknown. How many companies are unable to go public today because they aren’t big enough to merit the attention of the large investment banks who cater to short-term traders? How many future engines of U.S. GDP growth and job creation will be still-born and be forced in to a merger? Should they be starved of liquidity because they need to cash out investors, build working capital, but it is unavailable to them because they need less than $50 million?

Deninger points out in the article that “In recent years, VC firms have become too dependent on mergers and acquisitions as the exit strategy of choice. . .. In fact, most tech-start-ups are ‘built for acquisition’, as opposed to being built to become the next publicly held Microsoft or Oracle.” An addendum to his quote should be that merger synergy is code for firing people. Mergers trigger job losses; IPO’s create jobs.

In my view, it is wholly inconsistent with the Obama administration’s economic growth objectives for the current systemic liquidity crisis in our equity capital markets to be strangling our emerging technology growth companies while they are still in their venture capital cribs. We need to raise awareness of this severe problem because it threatens an entire generation of American innovation. Venture capitalists only make money if their investors make money, and many of their investors are the stewards of America’s pension plans. VC’s need to build companies that are cash flow positive as private companies, not only so that they can improve their negotiating leverage in the event of an acquisition but, more importantly, so that they can wait to go public until the regulatory constraints that have killed the sub $50 million IPO are lifted.

In closing, the article incorrectly asserts that “ironically, the tech IPO market is re-awakeining just as the NVCA prepares to roll out its initiative.“ The few IPOs so far this year are drops of water in the desert, and those that are in the queue, while they represent outstanding companies, do not represent a sufficient number of companies to make a material difference for the institutional investors and the many entrepreneurs who have the most at stake. Let’s not misinterpret false positives at the expense of the future of the American economy.

Keynote Speech at the Global Security Challenge, Chicago, September 22

2009-08-21T02:18:45Z

I will be the keynote speaker at the America Midwest Regional Final competition of the Global Security Challenge (GSC) on September 22nd in Chicago. This event is part of a global competition to deliver innovative solutions to pressing cybersecurity problems. The GSC Security Summit 2009, which will be held November 13 in London, will see the culmination of the six regional finals held around the world in September and October. The Summit will include the final pitches from each regional finalist in the SME and Start-up categories, as well as the ‘Dragon’s Den’ style closed-door Q&A with the expert Judging Committees. The award categories are:

Best Security SME
Most Promising Security Start-up
Most Promising Security Idea

Top contenders from previous Global Security Challenge competitions have subsequently raised over $55 million in new capital. The current open competition is for the “Most Promising Security Idea”:

The GSC committee recognizes that there are many potentially disruptive innovations that have yet to reach commercialization. Through the Most Promising Security Idea category, the GSC encourages innovators to continue to pursue their ideas and efforts. The award is designed to support and promote researchers, infant companies (with no revenue), and any other inventors who just have an idea for a security solution.

The winners of this category will receive:

$10,000 cash grant, sponsored by Accenture.
Mentorship from Mark Shaheen, managing director of Civitas Group.
Unparalleled networking opportunity with government officials and industry leaders.
Invaluable publicity.
Examples of our areas of interest are (but are not limited to): biometrics, detection sensors, cyber security, video surveillance, RFID, personnel protection, encryption software, data-mining, biotechnologies, and explosive trace detection. Who can Apply?: Eligible entrants must be a company, or one or more individuals, whose idea did not generate revenue in 2008.Deadline for Submissions: September 1, 2009 at 11.59 GMT.

For more information on the GSC CLICK HERE. I am proud to be involved with this competition as it represents the type of innovation challenge that drives entrepreneurs to develop breakthrough ideas into real companies.