Is venture capital dead?
Filed under: Technology, Columns, Investing
Venture capital (VC) is what used to drive the U.S. into the lead in the global economy. That ended around 2000 and it's been downhill ever since. Why? First, the dot-com boom let too many fake companies go public among the many real ones. Second, we had a lost decade when it comes to business-focused technological innovation. Now many question whether VC has a future. That's really the wrong question though -- they should be seeking the source of the next wave of business-transforming-technology.
Before exploring just how much woe faces VCs -- and by extension America's place in the global economy -- let's take a look at how VC became so important. It really got started back in 1957 with American Research and Development (ARD), which invested $70,000 in exchange for 70 percent of the now-defunct, Digital Equipment Corp. (DEC). Founded by MIT grad, Ken Olson, DEC took the lead in minicomputers and was a dominant IT company through much of the 1970s and early 1980s. In 1972 ARD sold its stake for a 70,000 percent return.
Business technologists and venture capitalists have been working hand-in-hand since the 1970s. In the 1960s, thanks to International Business Machines (IBM) and others, the mainframe computer found its way into large organizations. Such mainframes were tightly controlled by a centralized data processing department and there was limited opportunity for VCs because IBM completely controlled all doorways to its mainframes.
In the 1970s, DEC introduced the mini-computer which made it possible for companies to create many computer systems across different departments. The 1980s saw the rise of the Personal Computer (PC), which blew DEC out of the water as it distributed computing power to the individual worker, and VCs who put money into PC companies did quite well.
The latter half of the 1990s introduced the Internet to business. This created huge opportunities for VCs that invested in software, eCommerce, routers, consulting and a whole range of other companies that made it possible for business to profit from this new technology. Thanks to the vibrant IPO market, which woke up following the enormous success of Netscape's 1995 offering, The 1990s were a peak period for the VC industry.
But as I wrote in 2005, the business-focused technology innovation stopped about 10 years ago. That -- and the related dearth of VC-backed IPOs -- is why VCs have taken a huge blow in this decade. How bad is it? A third to a half of the 882 active VC firms could disappear, if only because poor returns -- 5-year VC returns through 2008 were 6 percent compared to 48 percent in 2000 -- will force under-performing firms to shut down.
Meanwhile, investment in VC funds shrank 39 percent to $4.3 billion in the first quarter, from $7.1 billion in the same quarter a year ago. This decline is due in part to the fact that endowments have been big investors in VC funds and they are hurting. For example, Harvard's endowment fell 30 percent in value in the last year and such collapses are making it hard for VCs to raise new money.
But the simple fact remains that unless engineers can come up with new technologies that will spur a new wave of business reinvention, there will be little of real value in which VCs can invest their dwindling capital resources. The few IPOs of VC-backed companies in this decade have been related to consumer technologies that only support one or two companies, rather than an entire business ecosystem.
Without such a wave of new companies, it will be difficult to support the kind of IPO boom that makes VC pay off for its investors. And without an IPO market, at $11.4 trillion in national debt, the U.S. is just the world's biggest debtor -- and that's not a prescription for economic growth.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
7-07-2009 @ 12:17PM
Gregory said...
It's times like this that I wished there were already some useful applications for stem cells. That way not only would people be healthier, there would be lots of money going into the biotech sector.
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7-07-2009 @ 2:59PM
Andrew said...
Your article makes clear that most of Venture Capital was really "hype capital" dependent upon Stock Brokerage firms finding "greater fools" willing to pay higher stock prices in initial public stock offerings for mostly copycat computer and communications technology companies. This "bubble" went on for a long time. Having over-invested in electronics and computer technologies, the VCs then crowded into medical related technologies, and one wonders with level of health care costs now choking USA at 18% of GDP where that will end (when USA has to clamp down on out of control health care spending). But an even bigger problem now confronts the VCs, which is the bulk of the former Wall St. Brokerage firms that used to hype-sell overpriced tech. stocks on the public are now gone.
With all the following former Wall St. firms all gone or part of big risk taking averse banks now, who's going to take the VC backed companies public at higher prices, and so generate the often illusory returns? GONE: Robertson Stephens, Hambrecht & Quist, Bear Stearns, Lehman Bros., LF Rothschild, Alex Brown & Sons...etc. All that used to compete to do IPOs at higher prices.
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7-10-2009 @ 4:58PM
LARRLY said...
WITH THAT NON LEADER OBAMA -THE GIVE AWAY QUEEN -IN OFFICE EVERYTHING IN THE ECONOMY IS DEAD----------------------------------------------------------------------
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7-09-2009 @ 12:54PM
JK said...
WWW.JKMAKINGMONEY.COM NO NEED TO RELY ON OTHERS TO EARN WHAT YOU DESERVE. WWW.JKMAKINGMONEY.COM
Reply
7-09-2009 @ 1:36PM
Josh said...
Who would want to invest large sums of money any more knowing the government will heavily tax the earnings of the new business? Socialism will slowly but surely kill all investment and innovation in America.
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7-09-2009 @ 1:40PM
Josh said...
Fire Obama, retire Pelosi ( in Leningrad).
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7-09-2009 @ 4:33PM
Bob said...
We are still investing,..... let us look at all deals over 1.5m
breyers751@aol.com
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7-10-2009 @ 8:01AM
Eldon Bliss Sr said...
Even as bad as it is , You can get good deals at http://shapauls.com
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7-10-2009 @ 11:51AM
Randall Barondess said...
Offering (Without V.C.) we would be a third world country.
July 10, 2009
Westlake Village, CA
GABULOUS-REVOLUTIONARY FREE CONSUMER VOIP SERVICE
SEEKS BUYER OR JOINT VENTURE PARTNER
FOR ITS PATENTED TECHNOLOGY
WESTLAKE VILLAGE, CA – GABULOUS.COM, the inventors of a groundbreaking free consumer Voice Over Internet Protocol (VOIP) telecommunications service supported by relevant advertising information, is seeking a buyer or joint venture partner for its patented technology.
The groundbreaking GABULOUS.COM technology brings free VOIP service to consumers via an ad based, non-intrusive delivery system. Consumers will get exactly what they want, free phone service, discounts and coupons on their favorite goods and services. With over 24 million current VOIP subscribers nation wide, and a projected double digit yearly growth, this represents the next big play in the technology sector.
Among the key features of the GABULOUS.COM VOIP service are patented proprietary technology, seamless integration of relevant advertisers, friendly and intuitive consumer interface, and an elastic revenue model allowing for affiliate and other ancillary revenue sources. This service will also be able to be private labeled for use by any large consumer based origination who wishes to offer this product to its customer and or subscriber base.
Randall J. Barondess, C.B.B., director of Troop Business Services Division of Westlake Village, CA ,who represents the ownership, said they seek to either sell their patent, enter into a partial sale of the patent, secure venture capital for build out, or participate in a joint venture for an inventor/employment-equity contract. Asking patent purchase price is $30 million.
Barondess said that GABULOUS.COM will provide “a unique VOIP service that combines community, content, commerce and culture in a way never before seen. Meanwhile, it will deliver what people have been starving for” – relevant ad information, free VOIP service, and discounts and coupons for their favorite products. The system will feature the newest, most advanced and reliable broadband VOIP technology combined with a sophisticated advertising model designed to generate revenue, promote user loyalty, and advertiser penetration”
A full executive summary, business plan, ramp up, and system drawings are available.
GABULOUS.COM plans a “soft launch” of its VOIP service as a Beta in Winter, 2010, followed by the launching of the production version of the site in mid-2011.
Troop Business Services is located in Westlake Village, CA and can be visited on the web at www.troopbusiness.com. Email: Randall Barondess at.... Business@Troop.com
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7-15-2009 @ 9:25PM
Jeanie said...
Your body can make all of the stem cells that you need, it just needs the catalyst to make it perform like it did when you were a child, Stemtech has such a product to help your body do just that. I joined them for 25.00!
I'm also an accounting student. One class I am working on finishing now pointed me to, www.prosper.com. This IS a venture funding site that is by the people helping other people. You can even become a lender with 25 dollars. The loans may come from several people rolled into one amount that is needed. it's a really interesting site.
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