I continue to be concerned about the inordinate amount of attention that Washington is giving to venture capital. There seems to be an assumption that VC investment is a White Knight that will help spur entrepreneurship in America and pull us out of our recession.
Remember, venture capital only funding a small part of the entrepreneurial sector. In fact, one study found that 99.962% of entrepreneurial ventures in the US had NO venture capital investment.
Rather than pour money into venture capital markets, as we now see talk of in Great Britain, we need to heed the words of Paul Kedrosky in his recently released study funded by the Kauffman foundation:
It seems inevitable that venture capital must shrink considerably. While there is no question that venture capital can facilitate some forms of high-growth entrepreneurial firms, its poor returns make the asset class uncompetitive and at risk of very large declines in capital commitments as investors flee this underperforming asset. While any estimate is subject to much uncertainty, it seems reasonable–based on returns, GDP, and exits–to expect the pace of investing to shrink by half in the coming years. We should also expect a continuing sharp decline in the amount of money invested in information technology, a maturing sector with declining capital requirements in its remaining innovative segments. Capital will continue to grow in other areas, including clean technology, but the sector must shrink its way back to health if venture capital is to provide competitive returns and secure its own future as a credible asset class and economic force.
Yes! Thank you! So many of our colleagues are spending all their time chasing VC funding when they should be building their company up from the ground. I know a professional businessman who gets a lot of respect for starting companies with venture capital, even though not one of those companies has been profitable.
Thanks for helping adjust our perspective on VC.
Well what you say makes sense on the surface but one of the reasons for the poor economy in states like CA, which taxes capital gains at personal income tax rates is because of a huge loss of income tax due to the lack of IPOs from venture-backed companies. Those wealthy entrepreneurs also gave a lot to non profits, which helped the economy as well. Sarbanes Oxley drove IPOs off shore, especially to London AIM. When venture backed biotech companies were able to raise multiple rounds of venture capital to develop new drugs the impact of these IPOs was significant on each region of the country and the states they reside in. If entrepreneurs and investors got an exit they created new companies that created new jobs and had new IPOs. Despite the small percentage of venture backed companies as a total percentage of all businesses, their impact on tax revenues, wealth creation, charitable giving, new company creation and the economy ove all is much larger than their percentage would indicate. I suggest you add to your analysis some additional metrics that reflect this.
Thank you
Once again you’re right on.
VC fund 1) their wealthy buddies 2) those who have invested a large amount of their own capital or 3) companies with robust revenue streams.
If you don’t fit into one of those categories, please save your energy.
And don’t think that an awesome Business Plan will get you through. A recent article by some University of Maryland professors said most VC don’t even look at a plans, especially for those companies who satisfy the requirements above.
Even if you have a exceptional plan that shows several billion dollar markets, they won’t believe you until you’re well on your way to making a billion.
If the government wanted to start new businesses that will create jobs, they need an agency that actually reads business plans and deciphers which ones are viable. This would allow those ideas that have been stifled by well funded competition to emerge. That would be great !