US Venture Capital Industry Needs to Shrink by Half
Paul Kedrosky, wearing his Kauffman Foundation hat, argues that the venture capital industry needs to shrink to about half its current size.
In a short new paper, he notes that “venture capital returns have deteriorated immensely, predating the current economic downturn and traceable to the rapid expansion in venture capital assets under management in the United States in the late 1990s, a figure that has fallen less speedily than one would expect, in part because of the long duration of funds and the general illiquidity of venture capital investments.”
“It seems inevitable that venture capital must shrink considerably,” Kedrosky concludes.”While there is no question that venture capital can facilitate some forms of high-growth entrepreneurial firms, its poor returns make the asset class uncompetitive and at risk of very large declines in capital commitments as investors flee this underperforming asset”
While any estimate is subject to much uncertainty, it seems reasonable—based on returns, GDP, and exits—to expect the pace of investing to shrink by half in the coming years.
“We should also expect a continuing sharp decline in the amount of money invested ininformation technology, a maturing sector with declining capital requirements in its remaining innovative segments. Capital will continue to grow in other areas, including clean technology, but the sector must shrink its way back to health if venture capital is to provide competitive returns and secure its own future as a credible asset class and economic force.”
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