Over a 10-year time horizon, venture capital firms returned an average of nearly 33%, compared to a paltry 3.5% for the S&P 500 index. But those returns include 1999 and 2000, the last few really good years for venture capital, according to an article in Business Week. Moving forward, the 1-, 3- and 5-year returns won’t look nearly as good, and when institutional portfolio managers realize the returns barely exceed the S&P 500, they are going to be reluctant to invest in such a risky asset class. Experts predict up to 30% of institutional investors may go elsewhere, trimming the ranks of venture capital firms.
Yet entrepreneurs and the U.S. economy will still need venture capital, and this painful period of adjustment may help strengthen the venture capital industry in the long run. The surviving VC firms will emerge leaner and smarter, with some of them engineering new ways to achieve higher returns, says Tom Crotty, of Battery Ventures in Boston. Others will turn to emerging markets such as India and China for opportunities.
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