Why The Venture Capital Model Is Broken

There’s a buzz in the blogsphere about Adeo Ressi’s recent treatise on why the venture capital model is finally broken. Ressi is founder of The Funded, a website that lets people rate venture capitalists. His musings about the current state of the VC model have hit a number of blogs and online publications, including The Industry Standard.

Ressi was invited to present his views on the subject at Harvard Business School. The venture capital model is fundamentally broken, Ressi says, because there’s more money flowing into VC firms than they are generating from their investments in start-ups. In other words, VCs are creating a negative balance on the economy. This contradicts what VCs typically espouse about their industry – that venture capital creates stock market growth and job creation.

There are several reasons why this may be so. Among them:

– Too many investors poured too much money into Silicon Valley, even after the 1990s, with too few deals to support it. So valuations were driven up to unreasonable levels.

– Larger companies like Yahoo, Microsoft, Google and Cisco are buying up start-ups earlier in their life cycle, thereby keeping the start-ups from becoming huge companies – and future competition.

– Greed on the part of some venture capitalists, who are tempted to raise even larger pools of money because of the fees they get on these funds, even if early-stage start-ups can’t absorb all the money thrown at them.

Ressi argues that not only is the venture capital model broken, but true innovation is undercapitalized. He feels that we are at an inflection point in the industry and changes are needed. He suggests fewer venture capital firms that invest bigger amounts into more companies. You can see his slide presentation at Slideshare.

Tagged as: Venture Capital, Venture Capital Jobs