Global Themes

On Globalization & Venture Capital

Squeeze below the Top

Stumbled across this NY Times story a few weeks ago: “Some Unrest Is Bubbling Beneath the Top Tier” on venture capital performance (free, but needs registration).

It graphically illustrates what insiders have known all along, i.e. – performance amongst VCs (and funds) varies tremendously – and talks about how LPs believe that “the industry is far less healthy than it advertises and that but for the most successful venture firms, it is struggling. ”

20070511_venture_graphic.gif  The article also mentions a recent NVCA meeting where LPs publicly stated that “venture capitalists on the whole have not made meaningful payouts for years to their limited partners”.

Eric Doppstadt, Director of PE for Ford Foundation put it more forcefully: “I find it shocking that an asset class that has provided so little payback continues to attract so much capital.”

This criticism has been around for a while now (see here and here) and although it is true that returns in VC have been (are?) highly concentrated, I dont think this is (or should be) be reason enough to doubt the asset class as a whole.

But something else in the article caught my eye: “According to the venture capital association, every year since 1997 the profit distributions from venture firms have been lower than the amount that they have invested” – is this simply the hangover of the dot-com bust – now in its final stages – or symptomatic of a deeper malaise (see “Beginning of the End for Venture Capital?“)?

I dont know for sure…but definitely something to think about.

Finally, here is an “estimate” from the same article that starkly illustrates the concentration of returns (attributed to Diana H. Frazier, Managing Partner at Flag Capital Management): “…(between) 1986 to 2002, only 32 firms accounted for 56 percent of money distributed

…and this slide appears to confirm that (thanks to Pat for this)

June 4th, 2007 Posted by | Venture Capital | 2 comments

2 Comments »

  1. Even more interesting stuff re how private equity (I see VC as a type of PE) gains are taxed, ahead of a parliamentary inquiry (I think) was in the FT yesterday. Combined with this, the industry is due for a shake up alright, but I think the issue should be framed in the broader context of the role played by VC/ PE in enhancing innovation and in national/ regional competitiveness.

    Comment by Shefaly | June 5, 2007

  2. Shefaly: Thats a very good comment.

    One could have a whole discussion around whether VC firms (or at least the under-performing VC firms) are a form of “subsidy” (or “tax” – depending on your viewpoint) that must be borne in order to enhance/maintain lead in innovation and/or regional/national competitiveness…

    Wonder whether I have opened a can of worms here.

    Comment by Shantanu Bhagwat | June 6, 2007

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