Forbes has a very interesting articled dated January 12th, 2009 titled Venture Capital's Coming Collapse. Sounds as if reality has finally caught up with the VCs too and not a moment too soon.
Here are a few key excerpts:
The swashbuckling risk takers in venture capital have been laying giant eggs for a decade. Could this finally be Sand Hill Road's day of reckoning?
The venture capital industry is staring at the most vicious shakeout in its history. Returns are pathetic for most funds, the public offering pipeline on which venture depends for its exit strategy is clamped shut, and with the shares of many big publicly traded tech companies swooning, those firms are less likely to buy up promising upstarts.
Heroes of capitalism they’re not. It has been 11 years since the venture industry has returned more cash than it has plowed into investments, according to the National Venture Capital Association. The industry is now managing $257 billion, up from $64 billion in 1997.
It would be helpful if there were some way of knowing in advance which firms are going to be the good guys. Apart from those in the very top tier, which consistently outperform, it’s difficult to know.
That’s always been the case in venture. But since equity markets cratered earlier this year, many big investors are scrutinizing all their holdings more closely. Illiquid investments like venture-backed startups don’t look so hot. VCs “have been living off fumes for a long time now,” says one prominent Silicon Valley investor. “If you have any money, the last thing you’re going to do is put it into an asset class that hasn’t generated a return for ten years.”
Until recently VCs have been able to keep the cash coming despite dismal performance because of the long-shot nature of their business: Investors know that one Google or YouTube could make them millions even if most other bets bomb.
The venture industry promotes that spin. Christopher Douvos is a manager in Palo Alto, Calif. with the Investment Fund for Foundations, an $8 billion investment pool headquartered in West Conshohocken, Pa. He sees the sales pitch of venture capital as “lottery slogans with an Ivy League veneer.” Instead of saying, “Hey, you never know” or “You’ve got to be in it to win it,” the industry talks about “asymmetric outcomes” and “optionality,” he says.
Just ten short years ago everyone and his uncle was a venture capitalist or at least claimed to be. People who by virtue of little more than pure luck had cashed in big after their employer had IPOed would regularly announce the opening of their very own VC firms. By 1999 half of the Microsoft staff were venture capitalists. Then it all crashed in early 2000. This is now the final nail in the coffin for the industry. Only the very best will survive.
Read Venture Capital's Coming Collapse in full.
We have now officially returned to the era old school creative financing for startups and early stage companies. The entrepreneurial world is as it should be.