According to articles in the Wall Street Journal and Inc. Magazine, Ghosh says the statistics are even more stark, depending on one’s definition of “failure,” as 95% of VC-backed companies don’t deliver the projected return on investment.
The discouraging numbers are nothing new, and yet the industry continues to grow with no end in sight. In fact, corporate-level VC investments climbed to $2.1 billion in the second quarter of 2012, a five quarter high, according to investment research firm CB Insights.
Ghosh’s numbers also don’t gel with what the industry at large is saying. The National Venture Capital Association’s VC Performance Q4 2012 report found that, “Venture capital performance for the 10-year horizon continued its upward climb.”
“It is interesting to note that 2012 is the first post-bubble year in which venture funds collectively distributed more cash to limited partners than they brought in,” said Mark Heesen, president of NVCA.
So, who is right? The short answer is that, while Ghosh’s numbers may very well be accurate, they aren’t going to scare venture capitalists away from continuing to invest in high risk, rapid growth startups, despite a discrepancy in the numbers that could serve as a cautionary tale.
(Read here for more on the structure of venture capital investments)
Entrepreneur and Huffington Post business blogger Faisal Hoque noted that when it comes to venture capital investments, money isn’t everything. Really, knowledge is power, more than ‘money talks’, when it comes to investing venture capital. “In today’s volatile market, the success for a new venture is often driven by its ability to recognize significant challenges and immediately identify the strategic imperatives necessary to address, survive, surpass, and thrive despite them,” he says.
Hoque noted that, “the theory that in a numbers game, some will win and some will lose, is not an acceptable approach, especially when fund managers’ fees can reach in the millions while investments may result in massive losses.” At exit time, or liquidation, or critical mass, Hoque, who himself saw his own VC-backed startup flicker out, said that conducting extensive due diligence in advance of all strategic decisions is imperative in an unpredictable business environment.
The VC industry still wrongly places the greatest emphasis on financial analysis versus operational capabilities, said Hoque, who offered advice to venture capitalists hoping to beat the odds of success:
- Ensure they have accurately evaluated growth potential, while balancing new innovation against operational execution.
- Check for the development of sustainable processes to reach or exceed revenue growth goals, cut costs to preserve recurring dividends, and protect top- and bottom-lines for portfolio companies.
- Have they implanted strategies for building sustainable brand recognition, in concert with building brilliant management teams?
- Can they demonstrate progressive, provable, repeatable results that will sustain the firm today and tomorrow?
- Look for the active creation of visibility among boards and investors of ongoing operations that provides perspectives needed to understand how to guide portfolio companies.