In recent weeks, we've seen encouraging action and growing interest at the highest levels in Washington, D.C. to the topic of promoting the innovation economy and keeping America in its position as leader in innovation-based economic growth. In the past month, Congress passed and the President signed the JOBS Act, which will make it more feasible for good, high-growth companies to go public by providing an "on ramp" to come into compliance with some regulations.
Today, I testified before a key subcommittee of the House Committee on Small Business: The Subcommittee on Economic Growth, Tax and Capital Access about the opportunities and challenges that small high-growth small businesses face in the arena of capital formation.
Here are the highlights of my testimony:
While access to credit remains an issue in the broader economy, in the markets we serve loans are readily accessible. With few other sectors providing comparably attractive risk-adjusted returns, banks are competing aggressively on deals. For credit-worthy companies of the type we serve, there is no shortage of credit.
Our performance in 2011 gives a sense for the level of activity we are seeing in the sectors we serve. During 2011, we increased the total amount of loans outstanding to the highest level ever in our nearly 30-year history. Though the U.S. and world economies sometimes seemed on the verge of falling back into a recession, the tech sector performed well, and banks responded by lending actively to tech companies.
There are a number of interesting trends on the equity front. A few weeks ago, Silicon Valley Bank completed a survey of early stage technology start-ups. At the macro level, entrepreneurs still see the availability of equity financing as a significant advantage for the United States over other countries. At the individual company level, however, more than one in three startup entrepreneurs saw access to equity financing as one of their greatest challenges, and fewer than one in three saw it as an opportunity to drive growth for their company. We believe this reflects a few underlying trends - some positive, some not.
- One, companies are adopting much more capital efficient models. That means they need less capital to grow.
- Two, venture capital investing levels have largely recovered from the steep falloff they experienced during the financial crisis.
- Three, other sources of capital are more and more active in financing early stage companies, ranging from angel investors to established corporations, which are once again increasingly active in financing start-up companies.
Public equity markets are an important source of that growth capital. There's good news on that front as well: after a long dry period, the market for initial public offerings, or IPOs, is slowly rebounding.
But while the picture has many bright spots, it isn't universally rosy.
While venture investing has recovered, venture fundraising has not. During 2011, venture funds did not raise enough capital to replenish what they invested.
Access to capital remains more difficult for more capital intensive ventures in more heavily regulated sectors, where the time required to succeed and the levels of regulatory and market uncertainty are high. This is most notable in the life science and cleantech sectors, both of which are very important to our broader economy because they offer enormous potential for growth and because we need innovation to help us provide affordable, effective health care to all Americans and develop stable, affordable, long term sources of energy.
Public policies can positively influence private sector behavior. However, they can also set up barriers that impede risk-taking and stifle innovation.
The recently-enacted JOBS Act offers promise that Congress can begin to confront the issues facing small, high-growth companies. I have also been heartened by the actions members of the House and Senate have taken to ensure the agencies implementing the Dodd-Frank Act take the time they need to adopt well-reasoned rules grounded in the facts, and to provide needed context to the agencies. For example, the Dodd-Frank Act included a provision commonly referred to as the Volcker Rule. Because of how it was written, the Volcker Rule could be read in a way that would stifle the amount of debt and equity flowing into start-up companies. Approximately 45 members of Congress have gone on the record to make clear this is not what they intended. The agencies have not yet adopted final rules.
The House is expected to take up the reauthorization of the U.S. Export-Import Bank in the reasonably near future. We participate actively in the bank's working capital guarantee program, and believe the basic structure of the Export-Import Bank's guarantee program is effective by ensuring that lenders create credit risk only when they share "skin in the game."
The technology sector is continually evolving in ways that will create new opportunities that we, as a country, can exploit to create jobs, promote our global competitiveness, and increase economic growth. It is vitally important that our economy, our political system, and our regulatory systems don't become hostile to risk, because without risk, there is no reward.
If we take the right steps, we can remain a leader in the innovation economy. If we don't, we will feel the repercussions throughout the economy for years to come.