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Robert Ackerman, a leading Silicon Valley venture capitalist and founder of Allegis Capital, says that tech IPOs will remain scarce and that this will curtail job creation in the US.
A continued scarcity of tech IPOs means that the Obama Administration won’t be able to count on Silicon Valley startups to help spark a job boom and help alleviate tough economic conditions for millions of unemployed.
Mr. Ackerman says, “These days, tech startups have to rely on being acquired by a larger company once they reach a certain size because there isn’t an IPO market to help them recapitalise and grow to the next stage. The largest expansion in jobs for a young company comes in the period after an IPO. If a company is acquired it doesn’t lead to the same job growth.”
But tech IPOs are unlikely to return to their former high levels because the infrastructure that supported and financed them has changed.
There used to be many boutique investment brokerages that had analysts following companies and sectors. After the dotcom bust many of those boutique brokerages disappeared or were acquired and now there is a massive shortage of analyst coverage. Without analyst coverage there is little liquidity in the trading of shares of small companies, and this discourages larger investors.
Mr. Ackerman said, “In 2007 we sold IronPort to Cisco for $830-million. This is a company that could have easily gone public but we chose to sell it. The lack of analyst coverage was a large factor in that decision.”
Sarbanes-Oxely is another issue. Young companies have to bear the very large costs of compliance reducing their earnings, which makes them look less appealing to investors.
And there are significant challenges in attracting investors in startups because of tax policies.
Mr. Ackerman has spent a lot of time in Washington, D.C. meeting with politicians and lobbying for the VC industry, seeking favorable tax benefits that would encourage investment in innovative companies. He says that venture capital is being regulated in the same way as hedge funds and private equity funds, which is wrong.
“Washington is trying to regulate the risk out of everything. We need policies that encourage risk taking, that encourage risks by entrepreneurs — that’s the way to create jobs.”
He says that one staffer admitted to him that, “We don’t really understand the issues around investing.” His reply was, “That’s fine but then don’t pass legislation about issues you don’t understand.”
He is also highly critical of US immigration policies because they restrict US access to the world’s most talented people. Attracting the best human capital is essential to maintaining US innovation yet many foreign-born top graduates of US universities are forced to return home.
“Every advanced degree issued by a US university should come with a green card attached,” he says. “Otherwise we will lose our lead in innovation to China and India. Investment in startups is already pouring into those countries and it wont be long before it overtakes the US.”