Venture capital funds don't go out of business; they stop fund raising and quietly fade away.
Five years after the tech bubble burst, venture capital firms are coping with the havoc that event had on fund returns and the way they do business.
A number of venture capital partners have retired in the past two years. Overall, there are fewer executives in the venture capital business, dropping to 9,266 from a high of 10,000 professionals in 2001, according to the National Venture Capital Association, Washington. And while the number of firms has remained stable, industry insiders say it will take another five years for that statistic to be affected — the six- to eight-year investment period can keep a fading firm in business as it winds up the investments of the last fund.
This slow rate of adjustment leads to more pronounced downturns, as institutional investors struggle to invest with a shrinking number of seasoned venture capital firms that are raising smaller funds.
And that, in turn, can lead to more overheating of the venture capital market during the booms.
"This type of delayed exit has been part of the reason the (venture capital) market has been so sticky, why downturns take so long to work themselves out," said Josh Lerner, the Jacob H. Schiff professor of investment banking at the Harvard School of Business, Boston.
The venture capital firms with new funds are either raising much smaller funds or moving up to midmarket private equity and raising much larger funds. What is clear is that the number of years between funds raised is lengthening to close to six years on average from a low of two and a half, Mr. Lerner said.