The state of global venture capital

The industry in the West is at a crossroads as exits dry up - a mistake India must avoid

- AKASH PRAKASH

Venture capital (VC) has been a fascinating industry to observe. It has delivered the best returns of any asset class over the last 30 years, but also has the highest dispersion of returns. The success of VC is one of the building blocks of the endowment model, which takes on illiquidity for higher returns. The investment success of the Yale endowment has been driven in large part by its bet on VC. Being in the asset class has made sense if you are invested in top-decile funds, where returns have been outstanding. If you are not in the top-decile funds, returns are more like those of public equities, and you may not get paid for the illiquidity.

Take the last 10 years as an example, the Nasdaq 100 delivered a return of 5.2 times, with the top 10 technology stocks delivering a return of nine times. Only a handful of VC funds have been able to beat that, and then you are illiquid for a decade or more in the funds.

The industry, however, seems to be at a crossroads, with many funds' lifespans being extended and distributions at all-time lows. Investors are questioning their long-term allocations, and new first-time funds are finding it increasingly difficult to raise capital.

The industry has gone through its own boom-and-bust cycle, with new VC investments rising from $100 billion in 2014 to a peak of $700 billion in 2021. Today, new investments are around $350 billion - while this is half of the peak, it still represents a historically healthy level of investment. The issue is more with exits, which have collapsed to less than $75 billion per year in the US after peaking at over $700 billion 2021.