Why the venture capital model is broken

Why should we care? Simply because while the 'smart money' is busy chasing huge hits, less sexy but perfectly viable ventures are getting ignored.

Consider that, on average, 4,130 companies were backed annually by VC money between 1997 and 2004, according to figures compiled by PricewaterhouseCoopers, Venture Economics and the National Venture Capital Association. If 2 per cent are 'home runs' (defined as projects with annual returns of 100 per cent and up), then we're talking about a meager 83 home runs a year.

Think about it: That means an enormous percentage of the 1,200 VC funds (even assuming some collaboration) are losing their shirts--let alone clearing those 20 pre cent hurdle rates demanded by investors to justify the risk. Indeed, the actual average return for early-stage VC funds during the 20-year periods ending between 1999 and 2005 was 17.3 per cent.