The VC Model is Broken (Again)

I don’t disagree with Matt on the thesis in his recent post, in fact I think he is well positioned to make this observation given the intimacy by which he covers the venture business, and the fact that he covered the last bubble as well, which gives him a good historical perspective.

While I don’t disagree with him I will say that there is a permanent structural imbalance in VC that simply doesn’t change and serves to exacerbate the amplitude of the swings from good times to bad. There are maybe a dozen VC firms that generate the bulk of returns, a handful of “individualist” firms that simply chart their own path to good success, and a whole bunch of followers that get slaughtered. This was the case in 2001 and it’s the case today.

Ressi was invited to present his views to the finance and entrepreneurship faculty at Harvard Business School, a place that historically has produced a lot of venture capitalists. Ressi’s message is that the venture capital industry is fundamentally broken.

[From The VC model is broken » VentureBeat]

Given the magnitude of the meltdown in global financial markets and the very real scenario of LPs not fulfilling their capital commitments, this cycle could be different from the last with a number of well known firms simply shutting down. Whatever the outcome, it’s doubtful that the new normal will be enjoyable for many in the business.