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Right-Sizing the U.S. Venture Capital Industry

Right-Sizing the U.S. Venture Capital Industry

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The U.S. venture capital industry is at an inflection point. It has had many successes over the last three decades, and is prominent worldwide for its role in financially catalyzing notable, high-growth companies. More recently, however, venture capital returns have stagnated and declined, with the industry having seen little recovery since its go-go days of the late 1990s.
The U.S. venture capital industry is at an inflection point. It has had many successes over the last three decades, and is prominent worldwide for its role in financially catalyzing notable, high-growth companies. More recently, however, venture capital returns have stagnated and declined, with the industry having seen little recovery since its go-go days of the late 1990s.

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Published by: The Ewing Marion Kauffman Foundation on Aug 10, 2009
Copyright:Attribution Non-commercial

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07/19/2010

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© 2005 Ewing Marion Kauffman Foundation. All rights reserved.
 
 
RIGHT-SIZING THEU.S. VENTURE CAPITAL INDUSTRY
Paul Kedrosky
Senior FellowEwing Marion Kauffman FoundationJune 10, 2009
 
 
RIGHT-SIZING THEU.S. VENTURE CAPITAL INDUSTRY
Paul Kedrosky
Senior FellowEwing Marion Kauffman FoundationJune 10, 2009
RIGHT-SIZING THE U.S. VENTURE CAPITAL INDUSTRY
2
 
 
© 2009 by the Ewing Marion Kauffman Foundation. All rights reserved.
 
 
RIGHT-SIZING THEU.S. VENTURE CAPITAL INDUSTRYINTRODUCTION
The U.S. venture capital industry is at an inflection point. It has had manysuccesses over the last three decades, and is prominent worldwide for its role infinancially catalyzing notable, high-growth companies. More recently, however,venture capital returns have stagnated and declined, with the industry havingseen little recovery since its go-go days of the late 1990s.There is a growing and important debate about where the venture industry goesfrom here. No one is seriously arguing that the venture capital industry will ceasebeing crucial in driving the growth of important companies in informationtechnology, clean technology, and biotech, all of which are risky and, to a greater or lesser degree, capital-intensive. But there is ample reason to believe that theventure industry, at least in the United States, will be differently sized andstructured in the future.This change will not come easily. Many venture industry participants arecomfortable with their industry’s size, structure, and compensation model, whichis tied to assets under management and can be highly remunerative. At the sametime, the industry has become conflated with entrepreneurship in the popular imagination as well as in policy circles, with the result being a widespread andincorrect belief that venture capital is a necessary and sufficient condition indriving growth entrepreneurship. The result is strong resistance to change, aswell as much support for the venture industry in its current form.This short paper considers one aspect of the future of the venture capitalindustry, its size. How big should it be in terms of the aggregate underlyingfinancial commitment to venture partnerships? Does it need to be larger to better equip entrepreneurs to solve the important problems we as a society face?Should it be smaller to take more risks, drive higher returns, and thus keepinvestors satisfied? How should we think about the role of venture capital in thefuture?
RIGHT-SIZING THE U.S. VENTURE CAPITAL INDUSTRY
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