https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png 0 0 Jennifer Zemel https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png Jennifer Zemel2021-06-01 15:31:142021-06-11 14:54:20VC University ONLINE: June 2021 Cohort Begins Today!
https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png 0 0 Devin Miller https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png Devin Miller2021-05-27 14:26:542021-05-27 14:26:54Growth and Momentum in Indiana’s Startup Ecosystem
NVCA’s ‘Spotlight On’ series highlights VC ecosystems across the country. Our second program featured Indianapolis. Chris LaMothe, Chief Executive Officer at Indiana-based VC firm Elevate Ventures, shares his perspective on the evolution of Indiana’s startup scene and why the region is poised for growth. Read more
https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png 0 0 Jeff Farrah https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png Jeff Farrah2021-05-19 14:21:422022-07-26 14:25:57Restrictions on acquisitions would stifle the US startup ecosystem, not rein in big tech
Bipartisanship has long been out of fashion, but one common pursuit among Democrats and Republicans in Washington has been placing Big Tech companies under a microscope.
Congressional committees have held scores of hearings, lawsuits have been filed and legislation has been introduced to regulate privacy and data collection. The knock-on effect of these reforms for young companies and their venture investors is unclear. But one aspect of increased antitrust scrutiny — restrictions on acquisitions — would have a significant negative effect on our entrepreneurial ecosystem, and policymakers should approach these changes with caution.
Acquisitions are an important element of the startup ecosystem
For VC-backed companies, there are effectively three outcomes: standalone company (often via an IPO), merger or acquisition, or bankruptcy. Despite best efforts, company failure is the most common outcome — more than 90% of startups fail. Fortunately, the success stories are often companies with a big impact, like Moderna and Zoom, which helped the world in the pandemic.
Entrepreneurs are optimists by nature, and so when the company journey begins, there is great hope of one day creating a standalone public company. However, in most cases, an IPO is not possible. The reality is that entrepreneurship is incredibly hard, and the journey from infancy to public company is one that relatively few companies achieve.
Silicon Valley Bank’s 2020 Global Startup Outlook puts it this way: “[T]he fact is most entrepreneurs never expect to reach a public market exit.” Accordingly, 58% of startups expect to be acquired. NVCA-Pitchbook data on acquisitions and IPOs back up the sentiment of founders when it comes to likely exit opportunities. In 2020, there was an approximately 10:1 ratio of acquisitions of VC-backed companies to IPOs, with 1,042 venture-backed companies acquired and 103 entering the public markets.
Some might argue that acquisitions are more dominant today because of the anti-competitive motivations of current tech incumbents. But as Patricia Nakache of Trinity Ventures said in testimony before the Senate Judiciary Committee: “[Acquisitions have] been commonplace in the U.S. since before the dawn of the modern venture capital industry.” In fact, today we are witnessing fewer acquisitions relative to IPOs than in years past, as the average acquisition-to-IPO ratio since 2004 is approximately 15:1. This is happening against a backdrop of challenges in taking small-cap companies public that has reduced the number of companies in the public markets today.
Acquisitions contribute to the health of the startup ecosystem, as entrepreneurs who realize liquidity through the sale of their company regularly go on to found innovative new companies and often invest in other startups as angel investors or venture capitalists.
Furthermore, acquisitions help power the returns of VC funds, thereby allowing VCs to raise new funds and invest in the next generation of entrepreneurs. This “recycling effect” is one of the key drivers of dynamism in our economy and should not be slowed down.
Acquisition changes could impact entrepreneurship
Despite the importance of acquisitions, antitrust reform has included significant changes to how acquisitions are assessed by the federal government. The two most prominent examples in this space are Sen. Amy Klobuchar’s Competition and Antitrust Law Enforcement Reform Act (CALERA) and Sen. Josh Hawley’s Trust-Busting for the Twenty-First Century Act.
These bills are likely a reaction to findings that incumbents have acted like Pac-Man, gobbling up would-be competitors before they become a competitive problem. But both proposals would ultimately harm startup activity and competition rather than propel it.
A common thread between these proposals is to restrict acquisitions by companies valued at more than $100 billion. Hawley’s bill would impose an outright ban on acquisitions by companies of that market cap that “lessen competition in any way.”
Klobuchar’s bill would shift the burden of proof to parties to an acquisition, a major change because the U.S. government bears the burden currently. This means if the government challenges an acquisition in federal court, the parties to the acquisition must demonstrate it does not “create an appreciable risk of materially lessening competition.” If that standard is not met, the acquisition could be blocked.
Both proposals have negative ramifications for venture-backed companies.
First, consider the scope of the proposals: A $100 billion company is indeed a large one, but setting the threshold there captures far more than the large tech companies that have been hauled before Congress for antitrust hearings. Globally, about 150 companies are valued at $100 billion or more, and the U.S. is home to more than 80 of those companies. That exposes acquirers as wide-ranging as Estee Lauder, John Deere, Starbucks and Thermo Fisher Scientific. If you are struggling to recall those companies being under the antitrust spotlight, then you are not alone.
Second, the legal standards imposed by these new bills are daunting. Klobuchar’s proposal leaves startups scratching their heads on where the line is on which acquisitions are tolerated, while Hawley’s bill throws up a misguided red light for vast amounts of acquisitions. These two standards are particularly vexing since acquirers are generally looking for acquirees that complement their existing business. In addition, many of the most acquisitive companies are multifaceted ones that presumably compete with an array of other companies in some way.
Ultimately, the bills from Klobuchar and Hawley would disrupt an important part of our nation’s startup ecosystem. Acquisitions act like grease to help keep the wheels moving by injecting liquidity into the system so participants can move on to create new and hopefully better companies for our country. Those wheels should not be slowed down when the country needs all the entrepreneurship it can muster.
https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png 0 0 Sabrina Fang https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png Sabrina Fang2021-05-17 16:45:022021-06-30 13:39:57NVCA Member Spotlight: Sapphire Ventures
https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png 0 0 Sabrina Fang https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png Sabrina Fang2021-05-12 13:36:212021-05-12 17:04:10NVCA Member Spotlight: .406 Ventures
https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png 0 0 Jeff Farrah https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png Jeff Farrah2021-05-11 13:28:002021-05-11 13:28:00The International Entrepreneur Rule – At Long Last
It only took four years, eight months, and ten days, but the International Entrepreneur Rule (IER) is now set to unleash new entrepreneurial energy in the United States. It is said that good things come to those who wait. But waiting is not enough in policy advocacy: IER is here today due to a sustained campaign of support from NVCA and others across the startup ecosystem. Read more
https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png 0 0 Devin Miller https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png Devin Miller2021-05-03 10:53:202021-05-03 11:26:13Building Better: S3 Ventures & Alkami
Welcome to the NVCA Blog series, Building Better, where we celebrate the dynamic relationship between our VC members and their innovative portfolio companies around the nation. For today’s Building Better, we spoke with Brian R. Smith, Managing Director of S3 Ventures, and with Stephen Bohanon, Founder of Alkami, an S3 Ventures portfolio company that recently had its initial public offering on the Nasdaq stock exchange under the ticker symbol of ALKT on April 14, 2021. Learn about their partnership in the Q&A below! Read more
https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png 0 0 Justin Field https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png Justin Field2021-04-23 16:29:012022-07-13 13:39:18The American Jobs Plan and the Startup Ecosystem
One of the central strategies of the American Jobs Plan is to use increased innovation activity to make progress on three critical societal challenges: climate change, access to economic opportunity, and competition with China. The bill seeks to accomplish this by using government resources to seed commercial activity through research programs, education and training, facility construction, and support for entrepreneurship, among other proposals. Read more
https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png 0 0 The American Startups and Job Growth Coalition https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png The American Startups and Job Growth Coalition2021-04-21 16:52:372021-04-21 16:59:56Venture Capital Investment at Work
Venture capital investment is often associated with job creation and higher wages, innovation, and economic growth, as numerous studies have found. A primary reason for this is the power of equity investment, where investors aligned with the long-term goals of a growth company provide capital to finance activities that lead to value creation over a period of years. We have been interested in learning more about the activities VC-backed companies prioritize to create this growth, so we conducted a survey to identify broadly what happens with venture capital investment once companies receive capital.
The findings, which we are sharing in this post for the first time, are striking. The survey results show that four out of five respondents spent at least 70 percent of their budgets on two activities, wages and compensation and research and development. This statistic highlights the extent to which venture capital finances job creation and innovation despite the risks inherent in funding companies expected to operate in revenue loss positions for years. 57% percent of companies surveyed responded that at least half of their total annual expenses were devoted to compensation, while 48% of companies spent at least 60% of total annual expenses on compensation. These percentages illustrate that startups and growth companies devote considerable amounts of the funds they raise to compensating their workforces.
Innovation is closely linked to productivity growth, a key source of economic growth and essential to progress in living standards. For this reason, the percentages of capital deployed to finance research and development amongst respondent companies are particularly notable. A remarkable 40% of companies reported spending upward of 50% of annual total expenses on research and development (R&D), 30% of companies spent more than 60%, and nearly a quarter (23%) of companies spent more than 70% on R&D.
Data on R&D expenditures for large incumbent corporations provide a useful comparison for our survey data and reveal just how heavily VC-backed companies spend on R&D. In 2018, the average expenditure on R&D as a percentage of revenue for Fortune Global 500 companies was 21.6 percent. The largest spenders were companies in pharmaceuticals, telecommunications, and information technology, none of which spent more than 26% of their revenue on R&D, a percentage which would land them around the bottom third when compared to respondents of our survey. While not necessarily an apples-to-apples comparison (our survey looked at R&D as percentage of expenditures while data regarding incumbent corporations look at R&D as a percentage of revenues), it’s more fair to look at total expenditures for growth companies as they generally are in a loss position and many would report spending on R&D far in excess of total revenues.
There is some interesting variance in the types of investment by the age range of companies. Forty-four percent of companies less than five years old spend at least half of their annual budgets on R&D, while 33% of companies five years and older do so. Conversely, 66% of companies five years and older spent at least half of their budgets on wages and compensation, while 52% of companies less than five years old do. This reflects a common trend in the company building process where firms often shift from research and product development in the startup stages to workforce expansion and other scaling activities in the growth phases.
As we see the one-year mark of the pandemic coming near, policymakers must increasingly focus on policies that rebuild our economy in a manner that makes us stronger and more competitive for the future following this crisis. This data confirms that encouraging greater startup activity throughout the country will lead to greater job creation and innovation, establishing a stronger base on which to build for the future. In addition, with many of these companies exploring solutions to broader societal challenges such as climate change and agricultural sustainability, the COVID crisis, and access to education, policymakers can address economic competitiveness and many critical societal challenges concurrently.
The Innovation and Growth Now by Investing in Tomorrow’s Enterprises (IGNITE) American Innovation Act is a bipartisan proposal that accomplishes exactly these objectives. This bill will allow high-growth companies to monetize up to $25 million in tax assets, providing liquidity to these companies through the downturn that can be used for job creation and R&D efforts, creating jobs now in a way that strengthens our economic future. And much of the cost of this bill will be offset over time through higher tax payments should these companies become profitable.
For instance, Illinois-based battery maker, NanoGraf, is developing a technological breakthrough in the performance capacity of batteries. But long research cycles mean NanoGraf can’t rely on short-term profits to survive. This proposal will provide companies like NanoGraf with capital now that will create jobs and drive innovation, strengthening the domestic battery industry—which is currently concentrated largely outside the United States—thereby improving the nation’s energy independence.
This survey showing such high percentages of expenditures for compensation and research and development among the startups and growth companies that make up the innovation economy is yet another powerful argument that economic development in the 21st century must focus on new company formation. Here’s hoping policymakers can work together and use this engine of opportunity to make progress in the country, and allow entrepreneurs to lead our post pandemic economic recovery.
Click here to see the full survey results.
*The American Startups and Job Growth Coalition includes: NVCA, TechNet, BIO, the Medical Device Manufacturers Association (MDMA), AdvaMed, the Center for American Entrepreneurship (CAE), Angel Capital Association (ACA), and the Technology Councils of North America (TECHNA).
For press inquiries, please contact Devin Miller at firstname.lastname@example.org
https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png 0 0 Devin Miller https://nvca.org/wp-content/uploads/2019/06/42865ff45b916762c541e2bffe9fa791b4165a45.png Devin Miller2021-04-20 17:12:152021-04-20 17:12:15VC Policy Pulse: The International Entrepreneur Rule with Yiannis Yiakoumis
Welcome to our VC Policy Pulse series, where we speak with a VC or founder on a policy issue that is having a major impact on the venture and startup ecosystem. Today, we’re speaking with the founder of a VC-backed startup about the International Entrepreneur Rule. Yiannis Yiakoumis founded Selfie Networks in 2017 and since then has raised VC financing from Bowery Capital, Lightspeed, and individual investors. Yiakoumis is originally from Greece and has been able to stay in the U.S. to build and continue to grow his company here through the International Entrepreneur Rule. We spoke with him about his immigration journey, utilizing the International Entrepreneur Rule, and what the rule could do for other founders who want to found new companies in the United States. Read more