State of Venture Capital

Siva Kumar emailed me a great article on the state of Venture Capital in Silicon Valley, in response to my VC-Entrepreneur Compensation Disbalance piece.

I suggest you read the article, but here are some sharp excerpts:

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It’s not that venture firms are destitute. They’ve got plenty of base hits. But the home runs are increasingly elusive. And venture capital is a home-run business, where the top 10% firms make up nearly 80% of the returns.

Internally, many investors are worried that only a handful of firms will break even on the current crop of funds, much less post stellar returns. In hushed conversations over breakfasts at Buck’s and lunches at the Sundeck, VC veterans are wondering aloud whether they should get out, or, after years of playing boardroom quarterback, whether they’ve still got the chops to actually build a startup.

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There is a bright side. With so much cash floating around the Valley, entrepreneurs have never had it so good. Sure, a lot of dumb ideas are getting funded, but nearly any great idea has a good chance of getting funded, too. There is likely a trove of new experiments being started on the sly. And ultimately, VCs will fund these deals, and that top 10% will continue to have huge hits with returns that the NASDAQ, bond markets, and even buyout firms can’t match.

The question is, in an industry that has gotten this big and this bloated, how long do the other 90% and their investors keep hoping for the next winning lottery ticket?