Venture Capital Declining

An article in this morning’s Wall Street Journal documents a decline in venture capitalists. Both the number of VC firms and their capital under management have declined sharply:

venture capital

A large number of individual VCs are also departing their firms. And, the Journal notes:

The actual number of exits might be even higher than the trade group’s figures indicate. Venture-capital funds are typically 10-year investment vehicles. That means even if a venture capitalist no longer actively invests, he or she can remain on a firm’s masthead because they have to wind up their investments in older funds.

The article is worth reading in full for its discussion of the factors — weak economy, reduced investment capital, natural turnover, etc. — that are contributing to the decline in venture activity and the departure of individual VCs.

I don’t know how much this generalizes (readers please chime in) but one VC friend of mine reports two other factors that may be driving him and some other successful VCs from the business:

First, he believes there has been “too much money in the asset class” which has lowered returns. That, of course, is a normal economic reason why the VC world might contract.

Second, he feels that the policy and cultural environment has become increasingly unfriendly toward successful investors. Higher taxes (already in place in the state where he lives, and on the horizon at the national level) are one major concern. Increased red tape is another. Both reduce the potential financial returns to being a VC and may lead some to leave the business.

On top of those concerns, there is a more qualitative change that may ultimately lead him to hang up his VC cleats: the sense that his accomplishments — building new companies, creating new jobs, and, thereby, earning substantial returns for his investors and himself — aren’t as appreciated as they once were, either by governments or the public at large. Without that appreciation, he reasons, his time might be better spent with his family, helping lead non-profits, etc. — than in growing new businesses.

About Donald Marron 294 Articles

Donald Marron is an economist in the Washington, DC area. He currently speaks, writes, and consults about economic, budget, and financial issues.

From 2002 to early 2009, he served in various senior positions in the White House and Congress including: * Member of the President’s Council of Economic Advisers (CEA) * Acting Director of the Congressional Budget Office (CBO) * Executive Director of Congress’s Joint Economic Committee (JEC)

Before his government service, Donald had a varied career as a professor, consultant, and entrepreneur. In the mid-1990s, he taught economics and finance at the University of Chicago Graduate School of Business. He then spent about a year-and-a-half managing large antitrust cases (e.g., Pepsi vs. Coke) at Charles River Associates in Washington, DC. After that, he took the plunge into the world of new ventures, serving as Chief Financial Officer of a health care software start-up in Austin, TX. After that fascinating experience, he started his career in public service.

Donald received his Ph.D. in Economics from the Massachusetts Institute of Technology and his B.A. in Mathematics a couple miles down the road at Harvard.

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