As 90s Recede from View, VC Returns Turn Negative

We know that venture capital isn’t the business it was a decade ago. Statistics, contained in a story published in the San Jose Mercury News this past weekend, drive that point home.

As the dot-com boom of the late 90s recedes into the mists of time, we can see that the venture-capital industry has been sickly for the past decade. Quoting from the Mercury News piece:

Venture capital is a long-term investment — one reason why the 10-year return is most often cited in comparing the sector to stocks, real estate and other familiar benchmarks. As recently as June 20, the industry’s 10-year return was as high as 14.3 percent — but that was far below the 34 percent of just one year earlier.

Now the dazzling 83 percent return to investors during the last three months of 1999 — the industry’s best quarter ever — has rolled off the industry’s 10-year performance record. The next report, Ganesan predicted, will put the ten-year return well south of -5 percent.

The longterm inclusion of data from the dot-com boom, many say, served to camouflage what former venture partner Georges van Hoegarden characterizes as the “sub-prime” performance of the sector in recent years.

Just to be clear, with the late-90s surge now excluded from the frame of reference, the decade-spanning return on investment for the VC industry is now -(as in minus) 5 percent. Limited partners will take a long, hard look at that forlorn number and question whether they want to bet their money at the same table. In many cases, they’ll decide to go elsewhere.

Yes, the mainstay venture-capital firms — Sequoia Capital, Accel Partners, and Norwest Venture Partners among them — are managing to buck the trend. They’ll continue to produce results and find favor from limited partners. A lot of other venture-capital firms will go the way of the dinosaur, though, with the herd being thinned to an unprecedented degree.

Another trend is at work, too. The IPOs and acquisition-related exits of the future will come increasingly from non-IT sectors. Clean-tech companies figure to be at the forefront of the action. When the best that IT has to offer is a social-networking service as ethically conflicted and vapid as Facebook, you know the halcyon days are long gone.

The world is changing, and venture capital will have to change with it.


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