The weak market for initial public offerings (IPOs) is in its second year, but a new research paper claims that the stumbling venture capital market may be a product of indiscipline on the part of the VC funds themselves. According to Forbes, a report issued by the Ewing Marion Kauffman Foundation demonstrates that VC funds have expanded their investments beyond control and must rein the money in if they want to return to profitability.
The Kauffman paper advises that VC companies—which invested almost $30 billion last year into start-ups—reduce their investment to the $12 to $15 billion range. Venture capital must “shrink its way back to health,” says the report.
VC spending increased by a factor of five between 1996 to 2001 in the midst of the Silicon Valley tech boom, leading to “a collapse in performance from which the sector has never recovered.” The flux of money has in turn led to overpriced valuations, which has itself led to lower profits.
Figures from the National Venture Capital Association show that VC contracted last year in the United States, with about 882 firms controlling $197 billion, versus 1,019 firms controlling $258 in 2007.