For years I’ve been talking about California Capitalism, how the traditional model of venture capital doesn’t work outside of the Bay Area, New York City, and Boston, and rather than just rant I’ve been explaining and implementing alternative investment models including revenue-based finance and holding companies.
The latest issue of American Affairs magazine includes a deep analysis entitled: The Crisis of Venture Capital: Fixing America’s Broken Start-Up System.
There was a time when venture capital generated big returns for investors, employees, and customers alike, both because more start-ups were profitable at an earlier stage and because some start-ups achieved high market capitalization relatively quickly. Profits are an important indicator of economic and technological growth, because they signal that a company is providing more value to its customers than the costs it is incurring.
A 2020 report by Morgan Stanley4 documents several key trends in venture capital, particularly the falling rate of returns over the last forty years (these findings are summarized in figure 1). Investments in VC funds by individuals and institutions have risen over the last twenty years, as have VC investments in start-ups, the latter reaching a record high in recent years. Yet returns on VC investment fell dramatically in the mid to late 1990s and have stayed low ever since, now barely higher than those of major stock market indices, an astonishing change when one considers the far higher risks associated with funding start-ups.
The whole detailed story at https://americanaffairsjournal.org/2021/02/the-crisis-of-venture-capital-fixing-americas-broken-start-up-system/