The Changing Landscape for Venture Capital

The traditional business model for venture capital (VC) firms has been to develop a portfolio of superstars along with long-shots. This idea that nine failures will breed one success may be somewhat ‘prehistoric’ following one of the greatest economic downturns since the Great Depression.

Across the board, the mere size and number of deals have declined since 2008. This past year marked one of the lowest years for VC funding in the last fourteen years, with a decrease of almost 20%. Notably, Biotechnology, with ‘$3.5 billion’ going to over 400 deals, is one of the few strong areas for venture capital investments (According to PwC Money Tree).

Regardless, to be successful in this post-recession era, venture capital may need to take on a new approach, a value-added ‘Business Model.’ Traditionally, the formula has been to invest, grow, and exit, all within 2-4 years, after achieving fairytale-like growth (10x; $10M to 100M).

There is reason to believe that ‘conventional wisdom’ may be wrong. After spending some time with a few start-ups, I have concluded that the following observations and modifications are noteworthy:

• VC’s should take a closer look at seed investments
• Textbook formulas don’t work; focus more on technical due-diligence
• Enlarge investment range ($500k - $5M) and extend investment period
• Diversify through more deals, lower investment costs, and push value before returns

Given, there are some VC firms that adopt some of these philosophies; by and large many do not. In this new decade of ‘entrepreneurial spirit’ and innovation, which philosophy will you follow?

Thanks to Flickr for the photo.