Although venture capitalists in the past decade to invest more than ever could, depression reigns in the industry. Is the Venture Capital Business Broken? Not necessarily – if the industry understands that there has been a structural, not cyclical change.
Summer 1996: venture capitalists from Silicon Valley put a few million dollars in a start-up, Juniper Networks, will produce the telecommunications equipment. Three years later, and some funding is Juniper Networks, which has become the first product ready to go public. At the end of the first trading day, the company’s whopping five billion dollars. Nine months later, their stock market value has increased tenfold. The profit for the investors: 10.000 percent.
At this time other investors put their money also one with a promising networking startup: Procket Networks. The sum is much greater than before at Juniper Networks. Around 300 million finally come together in several rounds of financing. Procket Networks is also three years after the founding of the stock market, though still without product. But the spark does not ignite: 2004 IT – equipment supplier Cisco, a leading network infrastructure hardware and Cisco Certifications provider acquires company in an emergency sale. This time the investors get out only a fraction of the capital employed by them.
The crucial difference between the two stories lies in what happened in 2000: the New Economy bubble burst. In retrospect shown herein but also the difference between the images of the Venture Capital (VC) has received in the 1990s, and the harsh reality of today. Ten years ago, venture capitalists seemed almost to be alchemists: Which start -up and touches it, turned it into pure gold. From this magic is not much left.
Since 2004, the average five-year yield fluctuates around zero. Spectacular IPOs are now a rarity, even though venture capitalists are still investing billions of dollars a year in new companies. Fred Wilson of Union Square Ventures takes as no bones about it: “Venture capital funds have earned throughout the last decade basically no money.”
Of course, the investor, this development has not left cold. On the contrary, the search for reasons sometimes resembled a masochistic self-flagellation. This is now the global economic crisis. Very hard to put Matrix Capital – founder Paul Ferri in 2006 in the Wall Street Journal: The VC industry has not “economically viable business model “more. A year earlier, Yankee Group founder Howard Anderson in Technology Review the “Farewell to the venture capital had proclaimed. Finally, when the company last summer and asked Polachi Co. about a thousand investors: “Is the Venture Capital business is broken? “It affirmed the half. Given the key role played by the venture capital to fund American innovation, this response is dramatic.
Of course, such disappointments are inevitable. Boom and crash has been in the VC industry, since it arose in the 1950s. Harvard economist Josh Lerner writes in his new book, “Boulevard of Broken Dreams”: “Groups have [repeatedly applied] enormous sums that they built it unwise – either at start-ups that would never actually have capital may have, or promising Founders, which they gave too much.”
The crashes that follow such excesses solve capital, mostly from an abyss of pessimism. Thus published about Paul Comper from the University of Chicago in 1994 a study entitled “The Rise and Fall of Venture Capital”, shortly before the New Economy boom began. Given two Stock exchanges quarrels in the past ten years and an erratic stock market – normally the exit option for venture investors – it would be a surprise if the mood was not somber.
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