SOX, Government, Venture Capital and IPOs

Is government squashing entrepreneurship?

Well, did I really have to ask?

James Freeman, an assistant editor of The Wall Street Journal editorial page, has an important piece in today’s (July 18) Journal. It’s titled “Who’s Going to Fund the Next Steve Jobs?”

The piece serves up some worrisome numbers regarding venture capital and IPOs:

• Last quarter marked the first time in 30 years that not a single company backed by venture capital went public in the U.S.

• Venture-backed IPOs in 2005 and 2006 were far below the levels of the early 1990s, never mind the boom years that followed. A recovery in the early months of 2007 still didn't push IPO numbers anywhere close to the number of young companies being acquired by bigger, more established firms.

Freeman worries that the venture-funded-entrepreneurial-drive model “may be collapsing.” Why? You guessed it – the ills of government over-regulation.

There is, of course, Sarbanes-Oxley, which means entrepreneurs become paper pushers, rather than, well, entrepreneurs. Freeman notes that Kate Mitchell of Scale Venture Partners pegs the “SOX tax” at “up to $3 million per year per company,” while Steve Harrick of Institutional Venture Partners pegged the tax at $5 million.

But there’s more than just SOX. Freeman notes that people like Jack Biddle, cofounder of Novak Biddle, point a finger at “the 2003 analyst settlement forced upon Wall Street by then New York Attorney General Eliot Spitzer. The theory was that separation between investment banking and stock analysis would eliminate biased research. The result is very little research of smaller companies by investment banks.” No research? That results in “no institutional buyers or liquidity for small companies,” according to Biddle.

Like we said, government squashing entrepreneurship. Read Freeman’s entire piece, and then wonder if our elected officials will ever fix the mess they’ve made.