Why is the Venture Capital Model Dying?
Some people suggest that Venture Capital is just in a normal cyclical downturn. Not a single venture backed company went public in second quarter of 2008. This has not happen since 1978. This was followed up by no venture backed companies going public in second and third quarters of 2009. This is clearly not just a cyclical downturn.
Venture Capital is built on technology start-up companies whose main assets are inventions. The value of these inventions is determined not just by their technical merit, but the strength of title to the invention. If legal title to the invention is weak, then a great technical invention provides a very limited opportunity for the start-up company or its investors. This clearly reduces the value of the company and the chances of return for it investors. Since 2000 the U.S. has significantly weakened inventors’ title to their inventions.
A thriving Venture Capital ecosystem requires a viable exit market for start-up companies. This provides returns for the Venture Capital investors, founders, and key employees. While mergers and acquisition are one exit market, a viable public market is critical for start-ups to obtain reasonable valuations in M&A market. As discussed above, the public market is essentially closed to start-up companies.
The book, The Decline and Fall of the American Entrepreneur, by Dale B. Halling, explains:
How we have weakened inventors’ and start-up companies’ rights to their inventions;
How the capital markets have been foreclosed to technology start-up companies;
How the accounting rules have changed to limit start-up companies access to human talent; and
How these changes to our laws are killing the Venture Capital market.
Get your copy of The Decline and Fall of the American Entrepreneur today. Available on Amazon.com.
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