Will The Four Horsemen Ride Again?

Venture Capital is getting dissed right and left these days...

From WSJ Venture Capital Dispatch
http://blogs.wsj.com/venturecapital/2009/03/03/will-the-four-horsemen-ride-again/

March 3, 2009, 06:57 PM EST
Will The Four Horsemen Ride Again? --> -->

By Scott Denne
The slow pace of initial public offerings has forced venture capitalists to find a solution to their late-stage liquidity woes, funding private exchanges such as InsideVenture Inc. (see our story here) and Web portals that let wealthy individuals in on the action. The drought, which started in early 2008, even spurred the National Venture Capital Association to launch a committee to investigate the issue, with the group’s chairman, Dixon Doll, urging the committee to “move beyond clichés, such as Sarbanes-Oxley bashing.”

Moving beyond clichés is one thing, says Paul Deninger, a vice chairman of middle-market investment bank Jefferies & Co. But, he asks, will venture capitalists own up to the part they have played in the withering of IPOs? As investment banking has become more consolidated over the last decade, Deninger said venture firms have largely stopped listening to the advice from smaller banks like his and tied their interests to those of the brand-name investment banks to their own detriment.

“Venture capital needs to take stock of itself and realize the error of its ways,” Deninger said. “The strategy of a Goldman Sachs is to serve [large companies like International Business Machines], not the VC ecosystem. When things were great, who was leading the charge?”

In the 1990s, four smaller investment banks, dubbed “the four horsemen” - Alex.Brown Inc., Hambrecht & Quist Group, Robertson Stephens & Co., and Montgomery Securities - underwrote a large number of the venture-backed IPOs, which averaged about 130 a year before the dot-com bubble, compared with about 40 a year since, he said. Those full-service boutiques employed a large group of research analysts that offered potential investors insight into the latest technologies being developed, and held conferences where technology companies could present to these investors.

The problem with the large banks, he believes, is they tend to serve only the largest institutions, which must put a more substantial portion of money into an IPO offering to make it worth their while. Smaller banks, meanwhile, cater to the “next tier” of institutional investors for whom $1 million is a meaningful position. By catering to smaller investors, but more of them, banks like Jefferies can get smaller offerings out the door and create demand for the stock after the initial offering, Deninger said.

The silver lining to the current economic climate, Deninger said, is that smaller banks are getting more attention from venture capitalists and institutional investors. “The firms that have gotten in the way of [the IPO] market are the firms that have gotten us into this mess.”