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February 07, 2006

Fixing US Venture Capital

Peter Rip of Leapfrog Ventures has a nice post on why the traditional Venture Capital model in the US is broken and how to fix it.
Venture capital is a three parameter problem. Buy low, Sell High, Sell at the Right Time. Most people seem to have ignored the third parameter. Time-to-exit used to be 4-6 years. Then it collapsed to 2 years in the Bubble. Now it seems pretty much infinite. Divide by Zero and get infinite IRR. Divide by infinity and get -100% IRR. The proof is left to the Investor.

With even the "bluest of the blue" Silicon Valley VC firms starting to make direct investments in (relatively mature) Indian companies, it sure seems as if the drying up of exits in the US is changing a lot of rules in the business.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.