Start-Up Supporting Venture Capital

We have observed several cycles and it seems like venture funds that do well, raise too much money in subsequent funds to invest in start-ups for long, and have to look to larger private equity deals. Those that don’t do well, go do something else. The end result; there is not much real continuity in start-up focused funds. And we need start-up focused funds. Recent statistics showed that the entire 2000-2010 decade has been relatively bad for venture capital, and that is bad for, as a friend of mine put it, the “entrepreneurial eco-system.” The National Venture Capital Association recently provided data showing that, for most of the last decade, a dollar invested in a venture funds resulted in that same dollar being returned to the fund investor. In other words the return was essentially flat; you got your principal back and nothing else. An article commented both that (i) the answer seemed to be smaller investments in smaller companies, and (ii) maybe venture capital is not needed since some tech start-ups need far less money to start than their uncles did in the 80’s. We have always argued that the real goal of all those supporting growth companies should always be a well run company. But we understand that venture capital is a money management business, not a start-up supporting business. However, we believe that you accomplish the former by supporting the later. It’s always true that to fold the portfolio company means lower returns than to fund a way to continue and build it.

-- Paul Marotta