The New York Times has an interesting article about VC firm Sevin Rosen telling investors that it couldn’t accept their money, explaining that “the venture environment has changed so that overall returns for the entire industry are way too low and even the upper-quartile returns have dropped to insufficient levels.”
It is a case of too much money chasing too few late stage deals which has pushed valuations up, coupled with a general move away from early to later stage deals as funds get bigger – why do a $500k start up deal with a 10% chance of payback in five years when you can do a $20m leveraged buy out and get an exit with a couple of years?
Sevin Rosens long term nanotech investments in companies such as Nanomix in 2002 illustrate the funds problems with “a terribly weak exit environment” – not just for nanotech.
The graphic above from the NYTimes paints a grim picture of declining yields although many in the VC community will disagree that the entire industry model is broken. It seems more likely that the tried and tested models that many VCs have been using since the dot.com days need to be overhauled and dragged kicking and screaming into the 21st century.