The VC Shakeout

This piece in HBR is must read, it details why there will be a lot fewer VC funds in the future.

The 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.

[From The VC Shakeout – Harvard Business Review]

Maybe the solution is downsizing the industry (which is happening anyway) or going back to basics or rethinking how we capitalize and manage venture investments… I really don’t know the answer. The easy part is identifying the problems, the hard part is figuring out what to do about them when the problems are structural in nature.

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