U.S. institutional investors are shunning venture capital at exactly the wrong time, two private equity professors say in a yet-to-be published paper.
Venture capital funds raised in 2009 and 2010 are likely to be strong performers, according to the paper by Steven N. Kaplan, Neubauer Family Professor of Entrepreneurship and Finance, The University of Chicago Booth School of Business, and Josh Lerner, Jacob H. Schiff Professor of Investment Banking, Harvard Business School Arthur Rock Center for Entrepreneurship, Boston.
“There's too little going into venture capital,” Mr. Kaplan said in an interview. That sets up the probability that values of deals will rise, boosting returns.
The two professors set out to see whether the venture capital model is indeed broken, as many observers have contended.
Their research analyzes venture capital commitments and investments as a percentage of the total stock market. It shows that, in the long term, the amount of capital committed to venture capital funds as a fraction of the total stock market has been fairly consistent. Over the 30 years ended Dec. 31, 2008, venture capital commitments have been an average of 0.13% of the total stock market. In 2009, that percentage dropped to 0.1%.
The analysis reveals that U.S. venture capital commitments have never gone below 0.05% of the total stock market; and with the exception of the three dot-com boom years of 1999 through 2001, commitments have not gone above 0.23%. Since 2002, commitments have run 0.146%, just slightly above the historical average of 0.139%, states the paper, “It Ain't Broke: The Past, Present and Future of Venture Capital.”