Around the beginning of May I saw two different pieces of news on the NVCA that have hung around in my mind as I've read through other piece of economic news. The first piece, at Red Herring, simply outlined some suggestions the NVCA made at its annual meeting in Boston at the end of April. The suggestions were aimed at the larger financial industry in the US for the benefit of whoever might be listening. A few days later Chris Bulger at PE Hub described (rather thoroughly, I thought) what he sees as two blind spots in the NVCA's view of life at the moment. And while he never actually mentions them, one would assume that he had the NVCA's suggestions in mind.

The NVCA's suggestions were straightforward enough. NVCA chairman Dixon Doll pointed out that only six companies went public in 2008. From the standpoint of the VC industry, a company going public (selling stock) is the mechanism for creating enough cash to allow the company to pay a venture capital firm some return on their investment in the new company. So the meager number of IPOs last year means that most VC funds aren't getting a return on their investment at the moment; their money is tied up in start up companies that are behind schedule for going public and (in the current economy) may fail. Red Herring summed up the NVCA's suggestions:

Mr. Doll asked that "both the private sector and the government address the breakdowns that have occurred within their respective systems," to solve "a situation that has become untenable..."

Specifically, the NVCA suggested greater collaboration within the U.S. financial system and improvements the way stock is sold and distributed in IPOs - improvements that would force some investors to hold IPO stocks instead of buying them to speculate on and flip quickly. And a final suggestion was that taxes on VC firms not be raised past the current capital gains framework.

Bulger at PE Hub made some interesting points in response. The first was that liquidity has become a major problem.

For a functioning IPO market that supports growth companies with all their natural volatility, we need trusted institutions that provide liquidity both directly (market making) and indirectly (trusted research). No one can arithmetically answer the question, "What is the right NASDAQ spread to compensate a full service I-bank for nurturing young volatile public companies?"

But the dialog around a healthy IPO market has to start with recognition of the need for liquidity providers and a willingness to foot the bill.

My impression is that Bulger is criticizing the NVCA's suggestion about forcing some investors to hold on to IPO stocks instead of flipping them for a profit on the day they're issued - but I'm not sure, and I don't want to put words in his mouth. The NVCA's suggestion, though, would seem to aggravate the liquidity issue.

Bulger's second criticism is more pointed. For an IPO market to recover, the financial institutions will have to build investor trust. The idea that the government and private sector might work together to make it easier for VC firms to encourage start ups to go public in this economy (where they might very well fail) - that's probably not something that will build investor trust. It might give VC firms a way to move the liabilities for weak start up firms off their books (and into the hands of new stockholders). But Bulger seems to be saying that that will further erode investor trust, not build it up.

Venture capital firms are probably going to have to just weather the storm, like the rest of us. Bulger seems to be saying that he's not sure they see that...