State of Innovation

Patents and Innovation Economics

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



December 21, 2009 - Posted by dbhalling | Uncategorized | , , , , ,

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  1. DB,

    Congratulations on the publication of your book. Hopefully it will make it to the best sellers list in the category of readers who can change the world.

    On the question of why the music stopped (bye bye Miss American Pie), perhaps some of it has to do with the unrealistic ROI (Return On Investment) that VC’s have come to expect during the hay days of the Internet Boom. The marginal cost of producing and distributing each next piece of killer application software is close to zero and thus the ROI rises towards infinity and beyond. Few physical inventions (except perhaps pharmaceuticals) can compete with that business model.

    So perhaps it was sheer greed, greed for ultra-maximized ROI that drove VC’s into the Internet Bust Corral and then finally out of business?

    Well, just a thought.

    Comment by step back | December 21, 2009 | Reply

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