The Vc Shakeout

In: Business and Management

Submitted By frnchconnectn77
Words 2033
Pages 9
ECONOMY 26 Luring a big firm to town is not the secret to job growth

DEFEND YOUR RESEARCH 30 Are morning people wired for success?

VISION STATEMENT 32 The social web’s east-west divide

COLUMN 38 Warren Bennis looks back on his surprising path to fame

New Thinking, Research in Progress hbr.org New Thinking, Research in Progress hbr.org

FIRST

The VC Shakeout
Venture capital hasn’t worked for a decade and must be radically restructured if it’s going to influence innovation—and make solid returns to investors. by Joseph Ghalbouni and Dominique Rouziès

83%

0%
VC QUARTERLY RETURN RATES, 1981–2009
SOURCE CAMBRIDGE ASSOCIATES LLC U.S. VENTURE CAPITAL INDEX

2%

T
ILLUSTRATION: ANDREW BANNECKER

he sky is falling on the venture capital rainmakers. Over the past 10 years their quarterly internal rate of return (IRR)—the primary measure of VC success—was dismal, hovering in the single percentage points and sometimes dipping into negative territory. Many firms have struggled to market new funds. Their main sources of profitability—IPOs of their portfolio firms—are fewer and farther between. Their backup strategy—selling their portfolio companies to other firms—is getting tougher and the prices are falling. Investments that once generated cash after

just two years now take six to 10 years to reach liquidity. A 2010 New York Times story on lean start-ups cites experts who see a “shrinking role for venture capitalists in seeking and backing promising young entrepreneurs,” as alternatives including angel investors gain favor. Fresh research by Josh Lerner and William Kerr of Harvard Business School bolsters this argument with evidence that entrepreneurs who obtain angel investing are more likely to survive at least four years and show improved performance. Another reason VC’s star is on the wane: Re-

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