Category Archives: Venture capital

Venture Capital: Money down the drain?

It was a glorious May day, her diamonds were sparkling, and we were at the Ritz, so it was hard to take her seriously. “I need to figure out how to make some money!” my very smart VC friend moaned. Huh. She’s one of the few women partners in a Silicon Valley VC firm; plenty of money there, right?

Well, yes, in a way. Plenty of VCs, plenty of money. But it turns out that my friend is right: not plenty of people making money.

Yes, folks, it’s true. VCs are not making money. The dirty little secret is out, and highlighted in lovely bar and line graphs throughout a recent report put out by the Kauffman Foundation. Indeed, over the past 10 years in the US, the returns on publicly traded small cap stocks, as measured by the Russell 2000 index, have beaten the VC returns. And the more recent VC returns are actually negative.

The venture capital industry has not always been a loser, of course. In fact, until about 5 years ago, the returns were healthy to very healthy. In fact, according the Kauffman report, in 2003 the trailing 5 year return was over 20%. Which is part of the problem. The high returns, combined with the period of incredibly good performance during the boom, attracted a huge amount of capital into the sector:  the total committed amount going up more than five times, in the space of one year.

Imagine: 5 times the capital. From less than $50 billion under management to over $250 billion.

Did the number of savvy teams and great opportunities increase by 5 times in the same span? Apparently not, if you go by the returns. Combine that with the fact that the VC’s favourite industry sector has gotten much less capital intensive over the past decade (it now takes about 30 seconds and $30 to launch an IT company) and the fact that the public, which happily gobbled up the shares of young, un-profitable companies in the past, now has a stomach ache, and the outlook for improved returns with this much money in the market is…how we say….pretty bad.

No doubt, venture capital has been very important to fuel the growth of some of the most important companies in the world – we know the names. Absolutely, it’s a vital asset class, and we welcome the growth of this industry in India.

But let’s also learn from the US….more is not always necessarily better.

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