By Jon Callaghan, Jeff Clavier, Josh Kopelman and Jason Mendelson
As venture investors, we spend every day of our lives working closely with some of the most innovative companies in the world. Yet we are continually amazed at how much our society asks of them:
We ask them to discover novel ways of making and doing things. Create products that save and change lives. Generate jobs and grow America’s economy.
We ask them to do these things in part because they’ve been doing them for decades. Former venture startup companies like Apple, Google, Genentech, Starbucks and FedEx imagined the world we live in today and then made it a reality. As investors, we believe that today’s generation of emerging companies are just as innovative and have just as much potential as those companies did.
The crucial challenge for today’s startups, however, is that the balance between risk and reward that spurred the growth of prior generations of young companies has swung too far away from the risk-taking essential for that growth. Today’s emerging companies must play a different game than their predecessors did. The rules have changed, but the expectations remain the same.
Make no mistake: Questionable judgment and bad behavior by a number of notable and large corporate bad apples made most of these new rules necessary. And our public markets are safer today because of these rules.
But their unintended consequence has been to choke off access for innovative young companies to the public capital they need to grow. As a result, the traditional engines of America’s economic growth are stalling out on the road to their initial public offerings –or bypassing it altogether. Today most of our companies view an acquisition as the preferable exit – and the stats prove it. Last year there just 40 venture-backed U.S. companies went public, compared to more than 460 that were acquired by larger companies. In a healthy market, we would see 10 times the number of IPOs to acquisitions, not the other way around. We need the next generation of emerging growth companies — the next Intel or Home Depot or Microsoft — to go public, not choose acquisition because an IPO is too burdensome a path.
That’s why we were encouraged by the passage last week of H.R 3606, also known as the JOBS Act, by the U.S. House of Representatives. Endorsed by leaders on both sides of the aisle and by President Obama, the JOBS Act contains a number of provisions that aim to restore access to public capital for America’s most promising companies. They do so by easing the regulatory compliance costs and burdens for emerging growth companies looking to go public in very narrow, limited and temporary ways. Meticulously crafted with input from emerging growth CEOs, investors and even former regulators, this new “on-ramp” aims to give today’s companies the same opportunities to grow that their predecessors had, as well as to increase the flow of information about them to investors.
In recent days, a chorus of critics has emerged – claiming that the on-ramp and other JOBS Act provisions will put us back on the road to the types of financial fraud that today’s regulatory regime aims to put permanently in the rearview window. Now, the bill’s fate in the Senate appears unclear.
That’s a shame. Easing the path to IPO for our country’s most promising companies – companies that have grown under our watchful eye and have achieved agreed upon milestones for years – will produce rewards that are well worth the risk, and we believe that HR 3606 does so in a way that maintains significant investor protections.
Which brings us back to the issue of risk and the role it plays in our market economy. We can try to temper its sharpest edges. Reign in its excesses. And make rules to distribute its costs more fairly. But we cannot eradicate risk altogether. A system without risks is a system without rewards. And a system without rewards benefits no one.
The founders, managers and employees at today’s emerging growth companies understand this risk-reward dynamic. They’ve already risked their futures to follow their dreams and build these companies. By passing the JOBS Act, the Senate can give them the same fair shot at achieving those dreams as the innovators that came before them had.
Given all that we expect of these companies, is that too much to ask on their behalf?
Josh Kopelman is a managing director of First Round Capital; Jason Mendelson, is a managing director of Foundry Group; Jon Callaghan is managing partner of True Ventures, and Jeff Clavier is managing partner of SoftTech VC. Opinions expressed here are entirely their own.