As a consequence of those new sources of equity financing, S corporations can seek a capital stream that's never before been available. Whether that stream proves to be a trickle or a torrent for the growth of closely held businesses, time will soon tell, says Evans. "After January 1, we'll see if there's a shift in fund interest. Until now fund investment managers focused on the public stock market. But if the market turns and everyone gets frightened, where else is all that money going to go?"
VCs Seek Less Venture
Even at this late point in the current economic expansion, more venture capital is available than ever. Unfortunately for small-business aspirants, more is less. The nature of venture capital is changing rapidly, notes venture capitalist William Elmore, a general partner of Foundation Capital, a Silicon Valley venture firm. One dynamic emerging from more than six straight years of plenty is the compounding effect of nouveau riche entrepreneurs streaming from prosperous companies and eager to start others. So many millionaires have been created among the employees of start-ups in the past few years (in going public in 1995, Netscape Communications created scores of paper millionaires, down to founder James Clark's own office staff), that there are fewer I-can-do-it-too hopefuls looking for seed capital. They've already got their own.
Not long ago, venture-capital firms called the shots and grabbed huge chunks of every deal. Today, awash in capital, the venture-capital industry rushes to accept a smaller share for a larger contribution with less risk. That's OK by Elmore, who has no problem letting rich, smart second-time-around entrepreneurs do their own early financing. More and more often his firm steps in only after customers are buying the company's product. Even in the later stages of a company's development, he says, "a small business coming to a venture firm saying, 'I'd like a half million dollars' is likely to hear, 'I'm sorry, our minimum investment is $3 million."
While statistics indicate that start-ups can still find venture cash (see " Are Big VC Deals Bad for Start-ups?"), the newly conservative venture-capital firms are achieving dramatically higher success rates in their investments. For instance, in Foundation Capital's last eight deals, six companies already had revenues when the first venture commitment was made. The typical cash-out interval has shrunk from about seven years to fewer than four. "We're building management teams that can execute rapidly and cleanly and reduce risk," Elmore says. "I'd rather have a smaller ownership position in a company that's likely to succeed." Even longtime speculators like Boston's TA Associates have turned ultraconservative; TA now admittedly seeks only situations involving companies that have $25 million in annual revenues.
But how long can new business be capitalized with billions of "dollars" minted out of thin air via hot IPOs, and aftermarkets that value new companies at 1,000 times earnings? "We're not even close to the limit," asserts Elmore.
IPO Threat Lingers
Only a few Wall Streeters assume that the stock market, and by extension IPOs, will continue to be hot in '97. One is Alfred R. Berkeley III. "I'm not in the game of predicting where stocks will go in '97," he ventures, "but there's every reason to think that unless something derails it, we'll continue to have a good market." To be sure, there's self-interest involved: Berkeley is president of the NASDAQ exchange. A novel underpinning of stocks today, he theorizes, is that the country's 50-somethings need 20%-somewheres to park their money in. For the first time in history, individual households have more money in the market than they have in banks. And that's not likely to change anytime soon. "You've got all these baby boomers starting to get serious about saving for their retirement," Berkeley points out. "They need a higher return than they can get from a bank in order to make their retirement work."
If stocks do cycle into a downturn, the plenitude of aftermarket investment capital nonetheless suggests that the window for IPOs, agape in '96, won't shut completely. But what might narrow the window are initiatives like the Retirement Savings and Consumer Protection Act. A binding proposition on California's November '96 ballot, the act would have removed the personal-liability buffer that a public company legally provides its officers and directors. Instead, it would have held them, as well as their accountants, investment advisers, and other corporate intimates, subject to punitive damages for issuing statements regarding the company's performance that later proved inaccurate. Sponsored by a lawyer (of course) specializing in securities-fraud suits, the initiative failed, thanks to the fact that nervous Wall Streeters poured some $40 million into defeating it. But a proposition like it may pop up again, with national implications: a shareholder in the state that passes such legislation could initiate a suit against a company incorporated in any state.
"This is the most negative piece of legislation I've ever seen," frets William Elmore of Foundation Capital. "It will dampen capital formation. Anyone standing to create wealth by building a growth company would face putting personal assets at risk." There will be fewer future IPOs if some founders choose not to go public as a result of lingering concern.
Consumers: 'Rainy Day?'
We hesitate to throw a wet blanket over what will soon become--barring two successive down quarters in the gross domestic product--the country's longest postwar economic expansion. But no one who's concerned with the health of the economy can ignore consumer spending. Consumers account for a whopping two-thirds of the GDP. Credit cards have been so abundant that to many businesses they represent a more enlightened mode of borrowing than approaching a bank and defending an analysis of their financial statements. Last year the piper got paid: consumers set records in both personal-bankruptcy filings and credit-card defaults. Is consumer debt a threat for '97? Could be, Tucker Anthony's Kathleen Camilli warns. "The ratio of debt service to disposable income is at the highest level since 1989--just before the last recession."
On the other hand, consumer nonspending would be an unwelcome business trend. But the economy can't have it both ways. "People today feel they deserve the good life, and if someone's dumb enough to send them a credit card, they're going to use it to pay for a style they can't afford," notes A. Gary Shilling, a former Merrill Lynch economist who currently heads his own advisory service. Nineteen ninety-seven's spenders have singular reasons to pull in their horns. "Given widespread job insecurity," Shilling cautions, "people ought to be putting something aside for a rainy day. Furthermore, nobody expects to get a dime out of Social Security when they retire, so you'd think they'd be saving like there's no tomorrow."
Which, if they keep spending as if there's no tomorrow, there may not be.
Robert A. Mamis is a senior writer at Inc.
