All Dried Up?

Market Fissures

Investment banker Kenneth Kamen, co-founder of Princeton, New Jersey-based Princeton Securities Corp. and chair of the trade group Regional Investment Bankers Association (RIBA), suggests the culprit for this ominous prediction is, surprisingly, the stock market itself. Specifically, he says, the markets are evolving and changing in ways that are tremendous for large companies and institutional investors but disastrous for small companies looking for capital, like Spunky Productions.

Based on this evolution, Kamen posits the following scenario as potentially very dangerous to the economic prosperity of the country. More precisely, as the markets get regulated into a posture that emphasizes large companies over small ones, the appetite for IPOs dries up. Venture capital investors and angel investors, seeing their exit strategies disappearing, pull in their horns and dramatically reduce the number and dollar amounts of investments they make in promising entrepreneurial businesses. Suddenly, the volume of venture capital tumbles from 1999's volume of some $50 billion to the $5 billion that the National Venture Capital Association says was more typical in the early '90s.

Where does the river of venture capital run? Read "The Truth About Venture Capital" to find out how to get a piece of this cash flow.

In many ways, the fissure has already begun. Consider these statistics: RIBA, which consists of investment banking firms that focus on IPOs of $20 million or less, has seen the number of deals completed by its members fall off dramatically as the markets have focused on larger companies. For instance, during 1994, association members completed 190 offerings and raised $2.3 billion. In 1999, the number was 38 offerings for $228 million. But the numbers provided by RIBA aren't the final word. After all, not every investment banker who provides services to small businesses is a member of the association. Yet, as a proxy for overall market activity, the trend they indicate is clear: The stock markets are less receptive to small businesses. Says Kamen, "It's not the investment bankers who are suffering from this decline, it's the companies looking for capital." history.

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This article was originally published in the November 2000 print edition of Entrepreneur with the headline: All Dried Up?.

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