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April 30, 2004

The Economist speaks on Venture Capital

Now that VC firms have started to attract and raise new funds--after a 3-year drought--The Economist magazine has felt a need to advice VCs not to get overly excited this time around (as well).

The article quotes Thomson Venture Economics' data to say that over the past 20 years, even including the recent downturn, VC investments have yielded an average 15.7% per year--higher than the returns from most other investments. "It also looks particularly attractive today, when valuations of both shares and bonds are stretched and when other so-called alternative investments are looking dodgy," the article says. "If only venture capital can avoid the excesses of the late 1990s, it could be one of the last few sources of above-average returns," it adds.

The Economist says the rebound is for real even in Europe citing the case of Cambridge Silicon Radio, a VC-backed maker of semiconductor chips for wireless communication that recently raised $165 million via an IPO in London.

After scolding Silicon Valley VCs for investing in 'social networking' start-ups ("a troubling echo of the boom years"), the magazine notes that they have been sensible in making sure their portfolio companies move software development work to India.

The article also notes that the typical VC investment in biotech have become bigger in recent years--unlike in the case of IT investments. "The new-product pipelines of the world's biggest drug firms have recently been running dry. They are increasingly relying on much smaller start-up and VC-backed firms to provide them with a flow of new drugs," it says.

Click Here to read the full article.