Right Sizing the U.S. Venture Capital Industry

This short paper considers one aspect of the future of the venture capital industry, its size. How big should it be in terms of the aggregate underlying financial commitment to venture partnerships? Does it need to be larger to better equip entrepreneurs to solve the important problems we as a society face? Should it be smaller to take more risks, drive higher returns, and thus keep investors satisfied? How should we think about the role of venture capital in the future? 

The U.S. venture capital industry is at an inflection point. It has had many successes over the last three decades, and is prominent worldwide for its role in financially catalyzing notable, high-growth companies. More recently, however, venture capital returns have stagnated and declined, with the industry having seen little recovery since its go-go days of the late 1990s.

There is a growing and important debate about where the venture industry goes from here. No one is seriously arguing that the venture capital industry will cease being crucial in driving the growth of important companies in information technology, clean technology, and biotech, all of which are risky and, to a greater or lesser degree, capital-intensive. But there is ample reason to believe that the venture industry, at least in the United States, will be differently sized and structured in the future. 

This change will not come easily. Many venture industry participants are comfortable with their industry's size, structure, and compensation model, which is tied to assets under management and can be highly remunerative. At the same time, the industry has become conflated with entrepreneurship in the popular imagination as well as in policy circles, with the result being a widespread and incorrect belief that venture capital is a necessary and sufficient condition in driving growth entrepreneurship. The result is strong resistance to change, as well as much support for the venture industry in its current form.