How Venture Capital and Startup Technology Works | Millionaire ...

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Venture capitalists grow businesses towards an exit strategy. They are not in the deal flow creation business, but they must identify deal flow to be successful.

The primary job of a venture capitalist is to successfully invest money in companies they find. Consequently, deal sourcing is their job. They view it as being so important to who and what they are, that they will not abrogate it to a third party. It is their USP (Unique Selling Proposition). Only they can pick winners. Consequently, the venture capital industry does not scale well.

Since 1984, venture capital in Utah has increased 200X from $10 million to almost $3.5 billion. State sponsored R&D has increased dramatically (USTAR, Centers of Excellence); university based entrepreneurship programs have exploded; Angel groups abound, and a cadre of service providers second only to the Valley exist.

In 1991 the venture capital industry invested approximately $2.2 billion in about 2,500 deals. In 2009 venture investment was approximately $17 billion being invested into about 2,000 deals. In the intervening years, annual venture investment varied from a low of $2.2 billion to a high of over $100 billion (2000). The number of true venture quality deals funded annually varied between 2,000 and 3,500 per year.

Since 2004, the ?Old Economy? ruling class figured out who was filling their office space, buying their big homes, and driving their expensive cars ? high tech employees. Armed with this new realization, programs for government and academia exploded. Overnight homegrown high tech economic development went from a cult to the number one mainstream religion.

So What is going to happen to the Venture Capitalist?

Deal creation and maturation take a lot longer than deal expansion and liquidation.

The economics of the venture capital model places very restrictive time lines and activities on the venture capitalist. This has resulted in an opportunity cost of the inefficient deployment of venture capital resulting in a lack of optimum job and new wealth creation

Recent restructuring and downsizing of the VC industry and the tight IPO, Acquisition, and Private Equity markets have created even greater pressures on the time lines and activities of the venture capitalist. Manifestations of this are seen in reduced management fees, lower or shared carried interests, fewer VC?s and VC firms, and rapidly falling valuations, and very poor rates of return (negative 3% for the last 10 years).

Also, demand for venture returns had caused LPs to put more and more money into fewer funds has evaporated with the poor returns and the recent financial melt down. The result has been a continued migration away from early stage funds to megafunds that due to their size can only invest in later-stage or mezzanine deals. It appears ?top quartile? in fund performance refers to the ?top quartile of the top quartile?.

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