The coming Silicon Valley VC implosion...

Silicon Valley's VC industry needs a complete overhaul otherwise it will shrink dramatically because of poor returns for investors...
Written by Tom Foremski, Contributor

By Georges van Hoegaerden, Managing Director, The Venture Company, is a long time critic of Silicon Valley's VC industry.

Mr. van Hoegaerden was born in The Netherlands and came to Silicon Valley to work at Oracle. He soon jumped head first into the startup life. But he quickly became disillusioned with VCs and a VC industry that lacks proper governance and consistent execution.

In a recent post: Saving Silicon Valley, he warns that the VC industry is facing an "implosion" because the VC returns are terrible, and sooner or later, the investors, the Limited Partners won't continue investing in funds that have mediocre returns.

"The startling revelation, as proven out by the empirical evidence I have delivered for quite some time now is that according to a renowned money manager 95% of Venture Capital (VC) firms are not making any consistent money for their investors (Limited Partners).

And that means Silicon Valley is at the brink of a serious implosion.

Imagine what would happen if only about 35 of 790 VC firms were to survive in ten years from now."

There is no reason why this should be the case. He points out that:

"With 80% of the world's population still not having access to meaningful technology applications, the opportunity to spawn new groundbreaking innovations remains enormous.

Technology adoption keeps growing, even when Venture Capital declines in its ability to govern worthy innovation. So, the opportunity dictates that there is much more room for Venture Capital firms to grow, just not for ones that cannot establish a proper investment thesis of innovation.

There is no valid reason why 100 VC firms with a single $100M fund cannot generate a six times return each, except for the improper deployment of risk. Certainly the gaping opportunity in technology dictates that there is also no reason why the total number of Venture firms in the U.S. could not reach 1,000."

But the VC industry is contracting not growing.

"A speaker at a recent conference claimed the demise in VC firms to be as large as 30% over the last 10 years, with as much as 50% of venture folks already affected. New Limited Partners to the sector I speak with simply see no reason for getting in, given its deplorable performance."

What can be done?

"Our government has simply not connected the dots between systemic failure in Venture and systemic failures in the economy, just yet. The pain and destruction probably has to become more obvious first. "

The cost of doing nothing is the US will lose its leadership position in innovation and it will be much poorer because of that loss. Innovation creates jobs and jobs are essential for a healthy society.

But changing the VC industry is a tall order and apart from a small handful of people such as Mr. van Hoegaerden, there isn't much appetite for change among the VCs.

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