The tech VC meltdown is already laying waste to smaller firms and those who entered the game too late. Even the best scenarios are unlikely to generate returns commensurate with the investment risk and lack of liquidity. Where will new capital come from? It is likely that a new player in traditional corporate venture capital will grow in importance: university-funded commercialization.
Venture capitalists style themselves as the stewards of entrepreneurship, offering cash (and supposedly expertise) to young Edisons seeking both fame and fortune. Stunning returns for early investments in companies like Google (Nasdaq: GOOG) (reportedly each dollar invested returned US$10,000) kept the dream alive for egocentric investors and entrepreneurs alike.
And yet like a Greek tragedy, the halcyon days brought the seeds of destruction. One recent analysis by Harvard Business School Professor William Sahlman demonstrated that median returns peaked in 1996 at 45 percent, and by 2008, those returns were -10 percent. Technology definitely lost its luster; last year, Cambridge Associates reported that returns in the electronics industry decreased from 157 percent on companies founded in 1998 to 5 percent for those founded in 1999; they have been negative for all subsequent vintage years. 1998 was clearly a banner year: Returns on hardware companies founded then reached 150 percent and have oscillated between -13 percent to +30 percent in the subsequent years, while 1998-vintage information technology companies generated astonishing IRRs of 275 percent and have been consistently less than 30 percent for all vintage years since then. (Observant readers will remember that Google was the crown jewel of the "entering class" of 1998.) It wasn't a bubble; it was a nuclear mushroom cloud.
To read the full, original article click on this link: E-Commerce News: Wall Street: Is Venture Capital an Academic Pursuit?
Author: Andrea Belz
