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VC Model Isn't Broken

  • GigaOm, Monday, November 17, 2008 11:16 AM
In a recent address at Harvard Business School, Adeo Ressi, founder of VC rating site TheFunded, proclaimed that the VC industry is "broken" because VCs are chasing too few opportunities. As a result, VC returns over the past five years have fallen below the total amount of money invested over that same time period. Certainly, that's bad news, but is this enough to proclaim the demise of the VC industry as we know it?

Hardly, says GigaOm's Matthew Ingram. While it's true that too many funds are popping up and pouring money into startups in the hope that they'll become the next Facebook or Twitter (two companies whose expenses far outweigh revenues, by the way), Ingram says the VC industry is still subject to the same laws of supply and demand as any other industry. When the likes of Google and Microsoft are gobbling up startups, returns are high, sparking a wave of copycat companies trying to gain funding by recreating others' success. When the likes of Google and Microsoft stop buying companies and the IPO market grows cold, the supply of VCs and companies overwhelms demand, and there is a contraction.

Just because the VC industry is starting to contract, "doesn't mean smart VCs can't prosper by concentrating on what they know, or by staying small enough to get more 'home runs.'" As Ingram notes, "The VC industry isn't broken any more than any other boom-and-bust industry is broken."

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