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Posts Tagged ‘Venture Capital’


Sarbanes Oxley (Sarbox) is starving high technology start-ups for capital.  Mathew Bandyk, in US News and World Report, suggests that not only has Sarbanes Oxley hurt venture capital, and decreased the number of IPOs, it is imposing costs on small businesses.[1] The reason that Sarbox is increasing the costs for small business, according to Bandyk, is that accountants are applying Sarbox rules to small businesses out of habit or conservatism.  In order for a company to go public nowadays, a company needs somewhere near $1 billion in annual revenue.  For more information on the damaging effects and absurdity of Sarbox see Sarbanes Oxley – The Medicine is Worse Than the Disease.  Since it does not appear likely that Washington is going to fix Sarbox anytime, how can we mitigate its damage?

 

There have been numerous articles and blog posts on the death of the venture capital model.[1] Only six companies that were venture capital backed went public in 2008, the lowest number since 1970.  There were also very few acquisitions of venture backed companies.[2] As a result, many venture capital firms are likely to disappear in the next couple of years.

Historically, venture capital funds have invested in a limited number of companies and taken an active part in the oversight of the companies.  Sarbanes Oxley and the likelihood of more financial regulation threaten the ability of start-up companies to go public.  Without a robust IPO market, it is unlikely that M&A activity will result in strong valuations.  Additionally, many IT start-up companies have low capital requirements and can forego traditional venture capital investments.

 
Phoenix: Mythical Fed Chairman Muses on the Economic Growth of the 90s

Phoenix: Mythical Fed Chairman Muses on the Economic Growth of the 90s

The Federal Reserve Chairman was sitting in his office contemplating the fantastic problem that he and the other fed governors were trying to solve.  The Federal Reserve, since its inception in 1913, had never faced such a dilemma.  Huge federal budget surpluses were likely to wipe out the federal debt in the next couple of years and the fed chairman was concerned how the Federal Reserve was going to control the money supply.  Buying and selling treasury notes was one of the major methods the Federal Reserve used to control the money supply.  Controlling the money supply was necessary to control inflation, ease recessions and deal with banking crises, such as 1930’s style runs on banks.  The Federal Reserve buys treasury bills when they want to increase the money supply and sells treasury bills when they want to decrease the money supply.  If the federal deficit was paid off, then the Federal Reserve would have difficulty using open market operations to control the money supply.  The Federal Reserve could still alter the discount rate or the required reserve ratio of banks to alter the money supply, but open market operations have a more immediate.

 

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