Trends in Venture Capital

Times are not good for the venture capital industry. A recent press release from the National Venture Capital Association and Cambridge Associates explained that ten year returns for investments in venture capital funds were now negative.

While the decade-long trend of poor financial returns to limited partners is the headline grabber, the venture capital industry has witnessed a number of other changes over the last decade.

At a May 2010 workshop on venture capital at the Federal Reserve Bank of Cleveland, I made a presentation outlining some of the industry trends. Rather than write about what the presentation said, I’m posting it here.

Venture capital trends presentation (PDF)

Venture capital trendsHopefully some of you will read it and comment. I’m interested to hear what others have to say about the trends.

14 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

14 Reactions

  1. Really enjoyed the presentation.
    It would seem obvious that the problem isn’t the state of the market now, but how much it got affected by the boom of the late 90′s.

    The answer is not to try and replicate that boom, but to teach potential start-ups that the main point of getting funding is to get a return!

    While this may mean that we don’t get another Google some time soon, it also means we don’t get another Boo.com either! :)

  2. Interesting presentation Scott, thanks for sharing. What I am confused about, obviously because I wasn’t at the talk, was the % of companies looking for IPO opportunities as opposed to those looking for private equity.

    If the main statistics were based on start ups looking for VC to enter the open market, then I would be inclined to say the lack of VC funding may not be due to the lack of actual investment but possibly the aversion of publicly listed companies.

    We are currently in an era where many start up companies are being built by technically minded Entrepreneurs. Typically the capital necessary to build these businesses is largely used to fund marketing costs and employee wages.

    If it only costs $200k worth of marketing to get the message out, is it worth making your company publicly listed? The cons far outweigh the pros when you are talking about a company that can be run at minimal cost but provide large returns.

    What was the % of VC’s for IPO’s in comparison the % VC for the private sector? I imagine the private sector info would be very difficult to obtain.

  3. At first glance the numbers don’t surprise me, only validate that VCs have been feeling and reacting to the slow economy. On second thought, the decline appears to me more as a correction of the runaway greed exhibited by VCs during the dot com boom of the late nineties. Perhaps VCs expectations have just taken this long to realign with the current reality?

  4. The data suggests to me that “things change” and the VC community has not understood that message very well. BTW, the “golden years” were a misnomer, as that was about first mover advantage and merely buying “eyeballs.” It will take 20 years (not 10) before VCs repeat those mistakes again.

  5. Great presentation. Further indication that this is the new normal. This is a combination of returning to a more stable level as well as the rise of Angel Funding and the fact that many entrepreneurs prefer to not need VC funding unless absolutely necessary. It really is a funding situation that very businesses will need. Most entrepreneurs can make more without VC funding.

  6. Shane,

    Thank you so much for this crisp data. Tough times.

    VC’s have a reputation of expecting massive returns, and with it, massive control.

    That’s not a positive recipe for today’s more transparent world. Maybe there are some VC groups that are willing to change their model a little. That could help.

    The Franchise King

  7. Nice presentation. Thanks for sharing. Don’t you think SOX killed the IPO market for most venture backed firms? Given the downturn in IPO’s has that also driven down exit valuations from M&A? Also, I don’t see a retreat to early stage deals. Many VC’s these days have little to no experience running an early stage company. Without that experience investing in anything under $10 million in revenue is very high risk and the potential for a total write off is significant. It would seem that many VC’s are looking for safer later stage deals that could possibly be taken public.

  8. EDITOR’S NOTE: The presentation is now updated. The earlier version had an incorrect slide.

    If you downloaded it prior to 9 PM EDT on June 29, 2010 please download the corrected version.

  9. Scott,

    What is the alternative to the venture capital market? When do you think it will change again?

  10. Great presentation. I suspect the other factor that fuels the tightening in the VC market is the broad range of new “alternative investments” that are gaining appeal to LPs. Cash inflows into hedge funds that specialize in a variety of plays in emerging markets are growing.

    Pension funds and endowments want to spice up their returns. The presentation shows that returns for VC have been poor, so the LPs can allocate their riskier investments to a bunch of other things. Asia, Africa, Latin America are no longer exotic investments. They are pretty mainstream and many LPs are investing directly.

  11. Thank you for the very informative presentation. I am a recent college graduate and have taken a great interest in VC, and thus am not pleased by the lack of growth within this market. Is it possible that with an adapted model (more transparent, smaller amounts of money being invested, more organic control approach) and innovative advertising, media placement, and targeting, VC’s can become busy and successful again?

    Would it take a new VC? Or a reformed well-known VC?

    If anybody works in a VC and would like to hire a young, dedicated, creative and extremely hard-working recent Pace University graduate with a BBA in Marketing to learn the ins and outs of this industry, please let me know! I believe that VC’s still have a chance for re-birth, and I want to be at the forefront.

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