What Will Fix the Venture Capital Crisis?

Everyone agrees that the venture capital industry is in crisis. The question is how to fix it.

The drought in acquisitions and initial public offerings of venture-backed companies means diminishing returns for investors and fewer new jobs.

At the National Venture Capital Association’s annual meeting in Boston last week, the group presented a four-step plan to address the problem. At Harvard Business School, a group of professors offered their own ideas.

The N.V.C.A. plan calls first for the return of small investment banks and accounting firms. These helped small tech companies go public until the dot-com bubble burst and then they disappeared. In order for start-ups to start going public again, the big banks and accounting firms must partner will smaller ones to reinvigorate them, the N.V.C.A. said.

The second feature of the plan deals with new forms of exits, such as SecondMarket and other exchanges where start-ups can sell shares on the private market. The third thing it seeks is tax benefits, such as a more competitive capital gains tax rate for I.P.O. investors and tax incentives for clean tech companies. Finally, it wants regulations such as Sarbanes-Oxley and financial statement requirements to be eased for tiny companies trying to go public.

“It can’t be fixed with a stroke of the pen, but without fixing this problem, literally innovation will be at bay in this country, precisely at the time competition is increasing from abroad,” said Paul Maeder, a general partner at Highland Capital Partners.

At Harvard, two professors of venture capital and entrepreneurship had their own ideas.

Josh Lerner teaches a class on venture capital and will publish a book this fall called “Boulevard of Broken Dreams” on how public efforts to spur entrepreneurship and venture capital have, so far, failed.

He said the venture capital industry needs to focus on three other ideas to fix its problems.

First is patent policy. Patent litigation costs so much and takes so long that it is burdening small tech companies, he said.

Instead, he suggests a patent policy similar to that in Europe. There, he said, inventors can challenge patents with the patent office before patents are approved. In the United States, on the other hand, most patents are granted quickly and protesters have to go to court to fight them.

When there are patent trials, they should not be jury trials, he said, even though that has become increasingly common in the last two decades. Patent disputes are so technically and legally complicated that it is difficult for a jury to fairly decide the case in a short period of time, and they are almost always sympathetic to the patent holder.

The second change Mr. Lerner suggests is using federal funds to support start-ups, not just big, struggling companies.

“In our efforts to rescue failing giants, we are spending all this money keeping buggy whips afloat,” he said. “It seems a little crazy to say we’re going to invest all this money in sunset industries, not emerging companies.”

Third, the United States needs to do a better job keeping foreign-born scientists and entrepreneurs in the United States. He said it was inevitable that as countries like China and India became wealthier, they would also develop intellectual institutions and begin retaining their smartest people.

Lee Fleming, who teaches entrepreneurship to students from the business school as well as other programs like engineering, has another suggestion. American universities should more openly and generously disseminate technological ideas developed on their campuses, he said.

Only about one in a thousand technologies end up being blockbusters, yet universities in the United States negotiate as if they all are, he said. Entrepreneurs can sign a contract for intellectual property from some foreign universities in half an hour, while a similar agreement can take two years in the United States, he said. That contradicts universities’ mission to disseminate knowledge, he said.

“When universities start seeing tech transfer offices as profit centers, it can very quickly turn into counterproductive policies,” he said.

Fuente: http://bits.blogs.nytimes.com/2009/05/04/what-will-fix-the-venture-capital-crisis/