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February 14, 2006

Study predicts "degraded future returns" for US Venture Capital

A new academic study paints a not-too-rosy picture for the US VC industry. According to the researchers, the US VC industry has undergone a fundamental transformation ever since the early 1990s when pension funds started to significantly invest in the sector.

"As a result, the US VC industry has transformed into a supply-driven market. We estimate that even after the bubble burst, the VC industry is still inflated and predict degraded future returns," according to the paper's abstract. "Moreover, we project that if pension funds, such as CALPERS and the like, and other institutional investors will further increase their allocation for venture capital investments it will turn out counterproductive and further degrade the performance of the VC industry in view of the limited pool of fundable deals". Ouch!

Looks like might soon have US VCs applying as more than just investors in the company!

Hat tip: Paul Kedrosky

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.