What Is Really Happening to the Venture Capital Industry? « abovethecrowd.com

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What Is Really Happening to the Venture Capital Industry?

Many are speculating that the year two thousand and nine represents a fundamental turning point for the venture capital industry. Some are arguing that the industry is in dire straits after years of poor performance. Others have argued that the math simply does not work for the industry’s current size. Another theory suggests that permanent challenges with the IPO market call into question the fundamental economics of the VC industry . Lastly, some credible authors have suggested that things are so bad that a federal bailout may be in order.

What is really happening in the venture capital industry? It is indeed quite likely that the venture industry is in the process of a very substantial reduction in size, perhaps the first in the history of the industry. However, the specific catalyst for this reduction is not directly related to the issues just mentioned. In order to fully understand what is happening, one must look upstream from the venture capitalists to the source of funds, for that is where the wheels of change are in motion.

Venture capital funds receive the majority of their funds from large pension funds, endowments, and foundations which represent some of the largest pools of capital in the world. This “institutional capital” is typically managed by active fund managers who invest with the objective of earning an optimal return in order to meet the needs of the specific institution and/or to grow the size of their overall fund. These fund managers have one primary tool in their search for optimal returns: deciding which investment categories (referred to as “asset classes”) should receive which percentage of the overall capital allocation. This process is known in the financial field as “ asset allocation .”

Asset allocation is ...

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http://abovethecrowd.com/2009/08/24/what-is-really-happening-to-the-venture-capital-industry/

http://abovethecrowd.com/2009/08/24/what-is-really-happening-to-the-venture-capital-industry/