Technology Commercialization

Why the VC Model is Dying

I posted this in response to an Innovation Daily article entitled “Is the Venture Capital model dying?”

Venture Capital is clearly not just in a cyclical downturn. But its problems are not about invention value and title. Venture Capital is using an old business model not fit for the current period. The 10 Year Fund that invests $5M per company and expects IPOs when investments reach $10M in revenue doesn’t work. SOX has forced the IPO threshold to $50M. VC investees cannot normally achieve $50M inside a 10 year fund and they need much more than $5M to get that far.

The model is broke. Fund life may need to 20 years and investments of $25M each. The longer life will force ROIs way down and make VC funds difficult to raise. Further, the partners in the VC funds are not worth the 20% fee (management fee, carried interest) that they charge. They just have not been adding that kind of value. Lastly, the VCs that contributed to or caused the Internet bubble were rewarded, not punished. No wonder the model is broke.