We have been getting a large number of queries regarding how the debt ceiling, the S&P downgrade, and the market volatility are going to impact the venture capital industry.  First, we need to clarify the cause and effect that is taking place.  The seemingly unending and fractious debt ceiling negotiations caused the S&P downgrade which, in turn, is one of a few factors that is causing the current capital markets instability. Recently, I spoke about how the debt ceiling agreement is poised to impact venture capital here. While the S&P downgrade itself does not directly impact venture capital, the capital markets uncertainty caused by the downgrade is indeed problematic for venture capital.  Why?

Over the past several months, we have begun to see a marked increase in IPO registrations for U.S. venture-backed companies. Today, that number stands at 57 - the highest level of registered companies since before the financial crisis of 2008. These companies are quality candidates that have every intention of becoming public entities.  However, in the last week, the brakes were harshly applied to the steady momentum we were experiencing.  No company is going to go public when there are 500 point swings in the market on a daily basis. Several companies have postponed planned offerings and others will likely wait out this storm.  This environment creates delays we do not need.

At the same time, larger corporations who are buyers of venture-backed companies, are watching the price of their stocks rise and fall and quite possibly may slow down their acquisition strategies to understand better their own financial positions before spending cash. Thus, the current class of companies that are ready to exit will remain in the venture portfolio a little longer, which could impact venture returns.