No Exits -- How to Make Exits
There has been a lot of hand-wringing about the downturn in the venture industry and what it forebodes for entrepreneurs and VCs. The sites and commentaries are too numerous to mention. One post describing an entire industry event devoted to this issue can be found on Startable. There is also an article in the December issue of VCJ on the subject of the venture capital model. I think one (if not the main or even the only) issue is the lack of exits at decent return rates to investors. While that means returns to the VCs, it also means returns to their investors. The money won’t flow to the entrepreneurs or the VCs from the ultimate investors – pension funds and the like -- until they see a healthy return on a reasonable horizon. How is that for stating the obvious?
The problem then becomes how to promote good returns. It is impossible to get investors to buy IPO stock, if they don’t see good price growth in the stock. It is impossible to get an acquirer to buy at a favorable price if they don’t see the market return. In this world it becomes harder and harder (and less desirable) to start a company. As a result entrepreneurship declines, technological improvement slows, new company formation slows, employment slows, etc., etc., ...
So, the issue is, how do you improve the economics? I am sure there are a lot of ideas out there, but one idea is to change the tax treatment of NOLs so they are not lost in a sale (and not almost always lost in an IPO). Since NOLs, in a venture-financed company, are likely to approximate the amount of investment dollars, the tax benefit to a buyer (or the investing public in an IPO) would be equal to the total invested multiplied by the tax rate of the buyer (or in the case of an IPO, the tax rate of the company itself). This is a significant value boost. It would make deals more attractive. For a more detailed analysis of this issue, see the article Rick Schaul-Yoder and I wrote for the December issue of VCJ (registration required).
