Is the Venture Model Really Broken?


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more than 6,000 companies funded in 2000. That trend has since reversed, and in 2009-2010 the market is tracking to about 2,500 companies per year.

2. Too much capital invested per company. The average capital invested in venture-backed companies acquired in the mid to late ’90s was around $10M – $20M. This has grown to $40M – $50M in recent years (nearly $60M for 2010 M&A exits). Even though exit valuations have risen, the amount of capital deployed prior to exits has climbed even more rapidly.

It’s simple math to see that returns will lag if there are three times more companies chasing the same volume of exits and if the average capital invested in a company is rising more rapidly than exit valuations.

Bursting the Bubble

Many things contributed to the imbalance, but one of the biggest culprits was the massive, bubble-fueled influx of capital into VC funds.

Leading venture firms in the mid-’90s managed funds typically in the range of $100M – $200M, and many of those funds did phenomenally well. With that success came the opportunity to access greater amounts of capital, leading many venture firms to scale their funds to sizes of $1B and beyond.

Predictable consequences resulted:

• Start-ups were encouraged to take more capital than they needed and to spend aggressively in anticipation of potential growth.

• Strong competitive bidding for deals led to inflated pre-money valuations, which left little room for capital appreciation.

• Numerous “me too” companies were funded—all chasing after the same bounded market opportunities.

These factors served to degrade the investment returns of venture funds over the last decade. While weak returns can’t be blamed entirely on the overabundance of capital, the need to put excess capital to work from oversized funds certainly contributed to the problem.

For the firms that continued to embrace a more traditional approach to venture capital with properly sized funds, the results were far more successful. SVB Capital recently published a report analyzing the performance of more than 850 venture funds over the last couple of decades. The study found that a “higher portion of smaller-size funds have achieved significant returns…relative to large funds across most vintage years.”

VC on the Rebound

The venture model isn’t broken; it just failed to scale. Many of the venture firms that formed during the Internet bubble aren’t around today, and many firms with decades of investing are downsizing recently raised funds in an effort to regain the strong returns delivered in the past.

These trends will bring the venture market back into balance, and the venture industry will once again deliver the outsized returns that are expected by institutional investors. Innovation and entrepreneurship continue to accelerate, and venture firms can and will continue to play an important role in bringing that innovation to market. This is especially true in Massachusetts, where the country’s second-most-active cluster of venture capitalists is still counted on to create—and fund—competitive advantage in the local innovation economy.

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Luke Burns is a Principal at Ascent Venture Partners in Boston. Follow @

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2 responses to “Is the Venture Model Really Broken?”

  1. Unfortunately, it is hard to ignore that it remains really broken. I was an investor in 2 of the aforementioned companies and those investments were made 7 and 12 years ago. And the reality remains that most VC’s are not making early stage investments. The cycle time for VC’s to get ‘onboard’ with early stage companies is possibly slower than it is taking strategic corporations to partner with them or even bring their offerings to market. Boston has several truly unique early stage companies (Thred-Up, Daily Grommet, Fashion Playtes, Isabella), but most VC’s have panned them because of various misunderstood or antiquated stigma regarding risk assessments. The increase in Family Office investing in early stage companies has saved a lot of innovation and true early stage activities over the past few years. I’m hopeful that there is enough of an alternative investor base to support innovation and entrepreneurship until the VC model is truly fixed.

  2. Herve says:

    This is one of my favorite subject and I think the debate will remain opened for a while. You are right, there was/is just too much money so that any good idea is funded multiple times decreasing the likeliness of success of really original ideas.

    Now reacting on Matthew, Maxlinear also went public and was not 10 years old. Skype in Europe has been a huge success and was not 10 years old. But these examples are not common. Maybe we need to go back to the model of the 70s where VCs were real entrepreneurs AND seed investors. Index Ventures for which I worked has just announced an allocation their funds to seed funding ( ) which I think is a good step. Disclosure: I have no interest in this seed fund!

    But the question remains: as long as there is so much money for VC, the model may remain broken and unfortunately, the entrepreneurs do not seem to benefit from the abundance of money…