Ad_Venture Capital

Those of us who familiar with (and critical of) the Venture Capital industry saw this coming a while ago.  The July 11 2009 edition of The Economist reports that ten-year VC returns will turn negative by the end of this year.  These poor results are attributed to a combination of too much money chasing too few compelling start-ups, in a financial market patently unfriendly to the favored IPO exit.  According to Mark Andreessen (of Netscape fame), it could get worse with up to 300 of the 880 active VC funds possibly disappearing over the next couple of years.

The remaining VCs (and private equity managers to boot) can learn a few things from this mess-

  • Given the business climate and a dearth of great start-ups, an obese US VC industry will have to shrink.  Depending on the source cited by The Economist, the VC industry will need to reduce capital deployed by 40-60% to achieve acceptable returns once again.
  • Capital infusions are not enough.  As investors, you need to add real value in terms of operating expertise, relationships, interim management etc.  Look no further than the success of Bain Capital to illustrate this point.
  • The “home run” focused financing/exit model does not work in a business climate where capital is scare, revenue is late or rich exits are scare.  A more realistic investment philosophy could concentrate on hitting a couple more doubles.
  • The majority of disruptive [sic] technologies and business models that VCs love to fund rarely disrupt much except their balance sheets.  Last time I looked, the retail, record and wholesale industries are still standing.
  • With all due respect to Jerry Seinfeld, the generalist VC who invests along with the VC herd is not even a master of their own domain. Real investment wisdom can only come from a thorough knowledge of a few sectors/technologies at best, as opposed to the typical scatter gun approach.

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