Venture Capital Business is a Dud

While a venture capital guy saying that the venture business is a dud is a little like a grocery store owner warning others against opening their own stores — it’s arguably self-serving — the quotes from Greylock Partners’ Bill Helman in this snippet from a longer piece about the venture industry’s current fortunes are candid feeling:

…lackluster returns appear to be the norm for most venture capitalists, as only a handful of outfits have generated a majority of the industry’s reported profits over the last 15 years, according to analysis provided by those same respected industry experts, who asked to remain anonymous.
“It’s a dud of a business. And it’s going to get worse, too,” said Bill Helman, a general partner at Greylock Partners in Waltham, who agrees that between 15 and 20 firms have likely generated a majority of the industry’s returns.
A venture capitalist since 1984, Helman said the performance has left little room for the industry’s remaining investors, forcing many to gravitate toward riskier bets in “very early-stage” companies. It is a dynamic that concerns him and other longtime investors, who say the pattern is pumping the economy full of volatility: “I don’t think we have a clue about how much risk we’re putting into this market,” Helman said.
Yet cash continues to pour into venture capitalists’ coffers. Last year more than $17.7 billion was raised by new venture partnerships, despite the fact that there was an estimated $54 billion in unspent money sitting on the sideline, waiting to be invested. VCs raised only $10.7 billion in 2003, according to the NVCA.
Venture proponents say the funding wave has been a boon to the startup community, as entrepreneurs have developed and launched myriad products and services within the information technology and life sciences sectors. Those investments generate jobs, and will eventually create other economic opportunities and returns for venture firms, or so their argument goes.
Technology’s old hands see things differently. “If there’s too much money around, entrepreneurs think it’s a good thing. They’re wrong,” said Bob Metcalfe, inventor of the Ethernet networking standard and a co-founder of network equipment maker 3Com Corp. in Marlborough. Metcalfe has been a general partner with Polaris Venture Partners in Waltham since 2001.
“At the same time you’re being funded, 10 other (startups) are being funded that do the same thing,” he said.
Added one manager of a local multibillion-dollar endowment, “There are too many bad companies being propped up by bad money.” The investor, who asked to remain anonymous, said he only invests with a select group of venture firms that have returned seven to eight times invested capital over the long term.
The venture sector’s capacity problems have reduced his institution’s returns to around three times capital over the last few years, he said. He believes a major shakeout among venture capitalists and startups is in order, as the industry’s mid- to lower-tier firms have been virtually burning money. “A day of reckoning will come,” he said.


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  2. Is Venture Capital Dead?

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  3. I remember talking to a friend of mine who’d just started working at a large stock broking firm and the conversation sidelined into pro’s and con’s of private equity.
    Basically, he thought something like this “Why bother with private equity when you can get the same exposure with micro caps?”
    Sure…stick with early stage private equity, do the pump and dump, get the first day big bang, maybe the IRR’s gonna significantly beat the market averages…but it probably won’t- or not in the magnitude that would warrant all the risks, uncertainty, illiquidity and hard work.
    That said, I doubt private equity will ever be analyzed out of existence, that’s been done 100 times over and fund managers are still putting billions into the asset class….and I doubt they’re doing it on empirical basis. Private equity has always been and always will be an irrational investment, driven by animal spirits and diversification on the LP side of things and leverage on the partner level.
    We all know GOOG, AMZN and EBAY should never have existed in the first place, but they still do and we’re all the better for it!