WASHINGTON, D.C. -- The U.S. Treasury assembled investors, bankers and entrepreneurs Tuesday for talks on how to provide small companies in high-growth sectors with greater access to capital.
With unemployment still elevated at 8.9 percent, the Obama administration is taking a fresh look at the hurdles U.S. entrepreneurs face in launching and expanding smalll companies, which the government says have generated two-thirds of new jobs over the past 15 years.
Eager to pave the way for the next Google or Groupon, a 2-year-old Chicago-based startup reportedly valued at $25 billion, Treasury organized yesterday's conference to address constraints on startup financing.
As regulatory costs have soared, investors said that startups could no longer rely on an IPO for growth capital, leading even cash-generating titans like Facebook to attract investors through private markets.
"Over the past two decades, our financial system has undergone a significant transformation, and the way small startups find financing at each stage of growth has been part of that change," Treasury Secretary Timothy Geithner told an audience that included partners from top venture capital firms, SBA administrator Karen Mills and Gene Sperling, Obama's lead economic adviser.
"At the earliest stages of funding," Geithner noted, "small companies have become more reliant on angel investors, universities, or sector-specific investment shops." Given the trend, officials have signaled that they're open to considering how the U.S. tax code might be adjusted to recognize angels' expanded role in the economy.
At later stages of development, small companies are "waiting longer than ever to go public," Geithner said, "with an increasing number of U.S. companies going public in other countries, or even deciding to stay private and access different sources of funding."
The dearth of small company IPOs in the U.S. has officials concerned, despite the strong start for public offerings in 2011. Facebook, which tapped Goldman Sachs for a private share sale earlier this year, is the most recent high-profile company to have skipped an IPO.
Public stock offerings of small companies shrank to 10 percent of the total IPO market in 2009, down from 80 percent between 1991 and 1997, according to a study by Grant Thompson, a consulting firm. Officials worry that, by choosing not to go public, high-growth firms are not living up to their potential to create jobs. Data from IHS Global Insight shows that 92 percent of job growth in public companies occurred after the IPO date.
"Fast-growing firms that don't issue IPOs are usually acquired and acquired firms tend to cut or stop adding to their headcount," said Greg Becker, President of Silicon Valley Bank, at the event. "They might no longer need a finance department, for instance."
Several venture investors at yesterday's conference blamed the lack of IPOs on the 2002 Sarbanes-Oxley Act, arguing that the bill's regulatory requirements have simply made it too expensive to go public.
Geithner said his intention in hosting the conference was to get a better feel for what policymakers can do to spur innovation and investment in the U.S.
Recent analysis of Thomson Reuters' data reveals that while venture capital investment represents only 0.2 percent of U.S. GDP in 2008, the revenue generated by venture-backed companies represented 21 percent of GDP. And for every $24,564 of venture capital invested in 1970-2001, there was one ongoing job at the end of 2008.