Commentaries

Venture capital harms your wealth

The promise was certainly seductive: Lock up your money with me for five years and I’ll give you double-digit annual returns.

For years, that was an accurate equation for venture capital. From 1981 to 1998, there were ups and downs, but the 10-year return generally hovered around 20 per cent, well above most other asset classes. That return came at a price of course. It was illiquid and there was no secondary market. And there was a further catch. Most potential investors were excluded: Venture funds were relatively modest in size, there weren’t very many of them and they were picky about whose money they’d take for their limited partners.

The dotcom boom changed all of that. Venture capitalists became business magazine stars, new funds sprouted up all over, and established firms with a decent track record were suddenly able to raise nine- and ten-figure funds.

The 20 per cent mark began to look pallid. In 1999 the U.S. venture industry was boasting five-year returns of nearly 50 percent, as a flood of IPO’s provided swift and lucrative exits. The end-to-end return, net of fees, expenses and carried interest, for the year ended March, 2000, was 310 per cent.

Alas, that was then. New York VC Fred Wilson, principal of Union Square Ventures, reckons average returns over the last 10 years are in the range of 6 to 8 percent. Aggregate industry figures are still flattered by the anni mirabili of the dot com era, and the staggering venture bonanza of the Google IPO for a handful of elite firms. But when 1999 drops out of the 10-year calculation average returns will slump to the low single figures or negative.

The returns have shrunk, yet the industry hasn’t contracted all that much. According to data from Thomson Reuters, in 2008 there were 882 existing venture capital firms with $197.3 billion under management. That represents an increase from the go-go year of 1998, when there were 624 firms with $92 billion under management.

Venture investments have been ticking along at a fairly constant rate as well. There were two astoundingly anomalous years — 1999 and 2000 — when US venture investment was $52 billion and $102 billion. After the dotcom crash, that slumped to $39 billion in 2001 and all the way down to $19 billion in 2003. Last year’s $28 billion was down from 2007′s $30 billion, but before 1999 the biggest year in the industry’s history, 1998, had seen just over $20 billion invested.

Q2 VC investment rebound as health overtakes IT

One sure place you’d expect to find green-shoots thinking would be in venture capital precincts. Figures released over the weekend show the industry staging a minor rebound during the second quarter, only not in the usual ways.

U.S. venture capital investments grew by nearly 32 percent during the second quarter to $5.27 billion, rebounding off the lowest quarterly levels in 11 years earlier this year, according to data from Dow Jones VentureSource.