Venturing hope

US venture capitalists are strikingly upbeat on their industry’s future – despite challenges including potential tax hikes on carry, finds Amanda Janis.

“I sold a company today,” boasted one general partner to another before adding with a grin, “What did you do?”

Overheard at May’s National Venture Capital Association annual meeting, the back-row banter was one of many positive exchanges made during the conference just outside San Francisco.

Despite weak fundraising statistics – 32 US venture funds raised just $3.6 billion in the first quarter, a 31 percent decline from the same period in 2009 and the industry’s slowest 1st quarter since 1993 – US VCs are noticeably cheerful about their industry’s prospects amid a slowly recovering economy and improved, if still challenging, capital markets.

Part of this optimism can be chalked up to the idealism intrinsic to most venture capitalists. “I get to work with really intelligent people all the time, who are usually trying to change the world,” one veteran VC told PEI. “We don’t always succeed, but we try – who wouldn’t want to be a part of that?”

But, more tangibly, much of the enthusiasm stems from a recent uptick in US venture-backed exit activity: nine public floats and 111 M&A exits in the first quarter represented the best quarterly exit total since the fourth quarter of 2007. The M&A exit figure was the largest quarterly total since the NVCA and Thomson Reuters began tracking the data back in 1975.

Still more of the buoyancy relates to excitement around potential investment opportunities in sectors like cleantech. Peter Darbee, the chairman and chief executive of California utility giant PG&E, as well Jonathan Silver, executive director of the US Department of Energy’s loan guarantee programme, were among the speakers to discuss the US’ dire need for new innovation and green energy infrastructure. The message from America’s venture capitalists to both men? “We’re here to help.”

Of course, such help can only be forthcoming if investors continue to invest in venture funds. If LP pocket books remain as closed as they are at the moment, some venture firms will disappear – a reality that has European VCs convinced the way forward is via government-backed funds of funds. Mark Heesen, NVCA president, told the conference’s 700 delegates that an industry contraction won’t mean that venture firms will be eviscerated, but that they will likely raise smaller funds with fewer partners. “There’s good and bad to that,” he said, noting that more syndication among firms will occur, with corporate venture capital providers playing a much more critical role going forward.

Heesen also used the podium to urge the audience to get involved in the carried interest tax debate continuing on Capitol Hill. “Please be ready to stand by and act,” he said.

One of the NVCA’s lobbying tactics over the past several years has been to distance itself from the buyout business, positioning itself as an engine for entrepreneurial advancement and job creation that does not employ leverage or financial engineering. “The government does believe that venture capital is different and wishes to encourage it,” said Heesen.

Now, most private equity firms – and indeed, this publication – would bristle at the suggestion that all private equity firms are leverage-crazed job-slashers and therefore more deserving of increased taxation than their VC counterparts. However, the NVCA’s call to arms has relevance to everyone in the industry – not just the early stage specialists. If you can sell a company today, big or small, that’s great. But don’t forget that amid all the various challenges – from fundraising to exits – that there is a political battle being fought at the moment, too. Private equity professionals of any colour, now is the time to make yourselves heard.