Venture Capital Scorecard

Venture capital funds continue to have a great deal of mystique, even in a down market. Forbes magazine has long been a vocal critic of hedge funds, private equity funds and the like, claiming that their investment performance is unimpressive while their fees are excessive. Moreover, Forbes has castigated investment companies of this sort for opaque reporting procedures and inadequate disclosures to investors.

A featured article in the latest issue takes up these themes, asserting that venture capital funds have bloated costs. Worse yet, 1997 was the last year in which they collectively paid out more to investors in returns than they took in. However, the funds are bound to reply that continued net inflows of investor money can (and are likely to) take place when investment returns are adequate.

While landing a position in this sector can be lucrative and prestigious, the long-term implications of Forbes' analysis seem to be that, absent a major uptick in returns, there is bound to be a major shakeout. Investors presumably will reach a point where they decide that the odds of earning a sufficient return are too low among these funds.