While the venture capital industry is known for backing icons such as Google, Genentech and Microsoft, only one in five of the fastest growing and most successful companies in the United States had venture investors: in other words 4 out of 5 didn't require or take venture capital investment.
Less than 1 percent of new businesses rely on VC source. Two years of dot.com bubble era hyper-returns conceal the poor overall VC returns on a longer horizon. The VC industry has become conflated with entrepreneurship in the popular imagination as well as in official policy circles, with the result being a widespread and incorrect belief that venture capital is a necessary and sufficient condition in driving growth and entrepreneurship.
The latest investor returns and exit data spells a major disparity for the current VC capacity and industry model.
"The venture industry needs to shrink its way to
becoming an economic force once again," said
Robert E. Litan, vice president of research and policy
at the Kauffman Foundation. "To provide competitive
returns, we expect venture investing will be
cut in half in coming years. At the same time, lowering
valuations and improving overall exit multiples
should help resuscitate the industry."
The venture industry has seen stagnating and declining
returns coupled with rapid expansion in venture
capital assets under management in recent
years. To fund entrepreneurs on a wide scale and indirectly
do societal good, the venture industry must
be viable—it must offer its investors competitive
returns. At present, it is increasingly uncertain
whether the U.S. venture industry can and will do
that.
The full article and analysis plus signpost to the original report can be found on The Chilli web site.
Why The Role of Venture Capital is Vastly Exaggerated
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