The venture business is a victim of its own success. A few key funds have given a rosy glow to the whole industry, allowing mediocre funds to ride on their coattails and drag down overall performance.
But as much as the mediocre general partners are to blame, limited partners are to blame, too. They have plowed billions of excess dollars into the VC business, offering life support to sickly funds that would otherwise die of natural causes.
“Between 1990 and 2000, the top two quartiles of all funds returned something like 96% of all the capital that was returned to LPs for that period,” says James Clarke, manager of private equity investments for the Kauffman Foundation. Clarke was one of six LPs who participated in a heated discussion about the venture business with Senior Editor Jerry Borrell for this month’s cover story.
Clarke compiled a list of “walking wounded” funds a few years ago, expecting most to fail when they set out to raise another fund. “But, every one of those firms, like a zombie, is still out there today, and most of them have raised new funds over the last 12 months,” he says.
Paul Kester, co-CEO of Allianz Private Equity Partners, contends that the VC business has twice as much money as it needs. That’s probably true, but you can’t expect mediocre venture firms to turn it away. LPs must start saying no to zombies.
That, I’m afraid, is about as likely as George A. Romero turning down an offer to make yet another version of “Night of the Living Dead.”