The Failure of Venture Capital by Ayan Agarwal

TL;DR - VC return rates may not be as good as they seem. This is due to a number of causes: there has been a substantial increase in the number of VC firms in the past few decades, founders can now crowdfund rather than rely on private equity, and many VC firms have merged which caused the pool to be incredibly large (billions of dollars) so they are less focused on investing in small seed staged companies.

Helpfulness - 5

Tags - VC efficiency, VC earnings, VC Areas of improvement

Questions answered:

  • Are VCs as efficient and successful as they could be?
  • What are VC earnings really like?
  • What are some areas in which VC lack as compared to other fundraising methods?

Summary:

  • In 2012, the Kauffman Foundation released a report showing that VC returns (on average) had failed to beat public indices over the past 15 years.
  • The past few decades have seen an influx of capital into VC firms from a variety of sources. Independent investors, foundations and pensions have all been pouring money into the black box that is a venture investment, especially in the United States. As a result, the number of venture funds has grown substantially.
  • Adding to the pressure on VCs is the fact that founders can now also pursue crowdfunding as a means to fund their venture. In crowdfunding, entrepreneurs receive very small amounts of capital from a wide range of people. Kickstarter, the world’s largest crowdfunding platform, has raised over three billion USD $3 billion for over 138,000 projects.
  • With the simplicity of the VC playbook, founders find themselves modifying their companies to match the ‘accepted’ funding schedule rather than attempting to experiment or pursue their own path to success and innovation.
  • Funds now find their investment processes less driven by pushing innovation at an early stage. Rather, they are guided by financial metric

Follow up links:

Definition of VC