Venture Capital Goes Back to Its Future

Venture capital, like the Dow Jones index, is rewinding the years. Only VCs are going back to the '80s, when the Dow was still under 2500.

Alan Patricof, in VCs Aren't Dead, Just Different, argues that most of today's funds, which can manage a billion dollars, are simply too big to function on the returns available.

Even before the meltdown, he argues that the glory days of venture capital were passing. Companies going public for amounts as small as $10 million (Intel, for instance). What do they need now? Now, they need to have a $50 million offering and be worth a quarter of a billion dollars, at a minimum. He no longer thinks most VC-backed firms can get there in three years, or even seven years.

Patricof wrote

We can no longer realistically expect the same kinds of absolute returns that were achieved in the past through a quick turnaround from start-up to liquidity through an I.P.O. Rather, I believe that most of the companies that venture capitalists are funding today will find an exit through merger or acquisition. And if we expect to achieve a return in a reasonable time frame of three to five years, we are probably looking at a sale price of $20 million to $100 million. This is the valuation range where most young companies are being acquired.

until someone solves the cost of going public and increases the liquidity in aftermarket trading, we as an industry have to downsize our expectation for exits as well as downsize the size of our funds. We still can produce significant returns for investors, but we cannot accommodate the size to which funds have grown in the past decade.