There is a new paper out by Kaplan & Lerner that tries to make the case that venture capital is, wait for it, healthy. I was sent it last week and, despite it calling me out for my VC downsizing arguments, I gave up at the point where they tried to defend venture capital’s prodigious assets under management, despite negative ten-year returns, by normalizing assets under management against equity market capitalization. Hello? You can’t normalize a bubble with a bubble.
A more tireless sort than me, my friend Bill Stensrud, has a posted a pithy, point-form rebuttal of the paper. Here are his main points, and you can go to Bill’s site for his full response: [-]
In the spirit of their econometric black box analysis I offer the following rebuttal:
- In 1960 business capital spending in the US was $30B and ITC represented 9% of that or $2.7B.
- In 2001 business capital spending in the US was $877B and ITC represented 39% of that or $342B.
- In that period business capital spending increased at a CAGR of 8.8%, ITC spending increased at a CAGR of 14%.
- Over 100% of venture capital returns came from ITC between 1960 and 2001 (other sectors showed overall negative returns).
- After significant declines ITC capital spending in 2008 recovered to the level of $300B, a decline of 14% since 2001.
- Total capital spending during that period remained nearly flat at $810B.
- ITC declined as a percentage of total capital spending to 37%.
- After 40 years of outperforming the economy by nearly 50% per year, ITC spending, the engine of Venture Capital has significantly underperformed since 2001. (Who can’t make money investing in a sector that is outperforming the economy by 50%?)
- Do you wonder why the venture fund returns since 2000 have been negative?
- With ITC running at 37% of the total capital spend, future ITC spending will approximately track the economy and will not outperform it.
- Venture capital thrives in immature markets with lots of white space. Mature business sectors present significantly smaller venture capital opportunities because the scale and coverage of the incumbents is overwhelming and they control the paths to market.
- The “historical results” of the Venture Capital industry occurred during a completely anomalous period when the investment sector was hugely outperforming the economy as a whole.
- That period is definitively OVER.
- The Venture Capital Industry in 2001 was (over)sized to reflect a bubble. that bubble has popped.
- There is, at the moment, no replacement investment area which can be leveraged to provide similar “rising tide” returns for the industry.
- The past only predicts the future until something changes and then it doens’t any more.