Innovation past and future: the Hidden Cost of Venture Capital

“A lot has changed over the thirty years that I’ve been
representing emerging companies. Way back when, venture capital
funds were small – $20 to $50 million, and they typically had ten
year terms, with options to extend for another three, so that any
non-public portfolio stock could be liquidated through an
“at-last!” IPO or company sale. If a fund got lucky and sold a
portfolio company early, it plowed the money back into new
investments. In short, VC money was a lot more patient back then.
Entrepreneurs were different, too. Almost to a man or woman, they
wanted to build a company and run it for the rest of their
careers.

“All that changed as venture capital got to be more popular with
investors. In the 1990s, successful VCs started changing the deal
they made with their limited partners. In the old days, a VC didn’t
make a dollar over their modest management fees (1 – 2% per year of
the investors’ funds) until the fund liquidated. Then the investors
got 100% of their money out first. Only then did the profit get
split up – typically 80% to the investors, and 20% to the VC fund
managers.”

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