Are VCs Screwed?
Sometimes when you play provocateur people lie down and agree, which can be a little disconcerting, as a moderator discovered in a recent panel at Harvard on the future of venture capital. He said that the industry was screwed, and the assembled VCs nodded sagely:
[Harvard Business School] professor Bill Sahlman threw down the gauntlet at a discussion on technology venture investing at the 11th annual Cyberposium conference held at Harvard Business School on November 19.
As an industry, he suggested, venture capital has little to recommend it. "In the future, I see a median rate of return of zero or less," stated Sahlman, observing that the top thirty venture-backed firms contributed 50 percent to 70 percent of distributions in the industry in the past ten to fifteen years. With so much global liquidity, he added, it will become even more difficult to earn a respectable rate of return as too many dollars chase too few opportunities.
"What's going to prove me wrong?" he asked a panel of venture capitalists.
At first, Sahlman found little resistance to his gloomy forecast. "You're right in the aggregate," conceded Stan Reiss (HBS MBA '00), a general partner at Matrix Ventures. "We're in the lottery business—but we know we're in the lottery business.
[via alarm:clock]
Here’s the thing: This should be no surprise. The venture industry has always been a hits-driven business, and the best funds do fish from the best-stocked ponds. Discovering that the venture investing pickings are crummy and getting crummier for everyone outside the top funds is not news. The real discussion should be about what venture funds can do to shape their deal flow, to create the best deals, be the best value-added partners, and be more than mere money — which, from a VC, is a commodity worth less than one dollar on the dollar.
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