Is the VC industry in trouble?

I had a discussion with an entrepreneur the other day regarding how VCs now look at deals to invest. I already talked about the fact that VC are not a solution, but rather a means to achieve the scale you need to get to with your startup.

One guys ones told me: “Look at this startup, they have VC funding, that means they are successful”. As much as I can disagree with that, the latest data I’ve read reinforces even more my feeling about what a VC can achieve for your startup.

The Cambridge Associates LLC release a study on the return of the VC asset class compared to other types of assets like Private Equity and Public Markets. We are going through a very interesting time as the returns from the bubble era are starting to disappear from the overall 10 years returns for the funds (10 years.. already!!). That means that we are starting to see how VC returns really are in a normal (though tough) market and the picture doesn’t look good:

8.4% return over 10 years for VCs and 8.3% for PE, it still looks significant but the return for VC in the last 9 years is actually -6%!!..

In 2 quarters ( as we get closer to the end of 2010) the full effect of the bubble should have disappeared completely and we should expect those numbers to get a lot lower if not negative.

What does it mean for startups that need such funding?

Well, you’d better choose the VC you work with very carefully because only a handful of them actually are successful. Getting money from any VC just won’t make it. The model is proving to be broken somehow and we might see a pretty big shift in the VC industry as a whole.

Startups need to get back to basics, building a service or offer that actually has great value for their customers and that can be sold. They need to build their product with whatever resources they have (which will take longer). Most important they should focus on the value to customers instead of focusing on how much money they can raise. In the long run, the payoff will certainly be way better. Funding is a means.. not an end.. Getting VC funding can fuel your growth (or simply make impossible) but it’s nowhere near a success.

Some interesting articles on the subject:

http://www.forbes.com/forbes/2009/0112/066.html

http://blogs.ft.com/techblog/2010/02/why-long-term-vc-returns-are-about-to-crater/

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