Paul Kedrosky, himself a VC, has concluded that the answer is the nature of the venture business itself: "The venture business is a bubble business". According to him, the performance and reputation of the top venture funds are "almost entirely driven by their ability to find and profit from bubbles, whether large or small: dot-com, networking, PC hardware, drives, Web 2.0, etc."
Take away those bubbles and turn venture into a steady-state, non-cyclical business and it would be transformed from top to bottom. There would arguably be no DFJ (Internet bubble), no KP (Internet and PC bubble), no NEA (PC bubble), no Sequoia (PC and Internet bubble), no Oak (PC and Internet bubble), etc.
Kedrosky also provides a definition of what constitutes a bubble:
A technology bubble is any period when the enthusiasm for a particuluar technology platform drives a significantly higher investor capital allocation than is justified by the probable returns.
Bottomline, he feels VCs should not be apologizing for or avoiding bubbles, but actually embrace them. Why? "Because the best venture funds are reliably those that enter and exit bubbles early."
And since it is almost impossible to identify a venture-ready bubble early, the best venture funds make many small bets on early, nutty and dangerous stuff. And it is a bad idea for VC funds to try to corporatize and systematize 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.