The Venture Capital Shakeout

WEBGUILD June 2010 -- The effect: The cycle is broken. To fix it, VCs must double their returns on investors’ capital, significantly scale up the VC asset class, or face the prospect of the industry’s shrinking in half.

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.
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