Silicon Valley may have invented “internet speed”, but the restructuring of its venture capital industry is taking place slowly – too slowly. Rationalisation is needed, and urgently.

The VC industry is suffering from massive over-capacity. Far too much money has been put into it. In 1995, there was just $5.6bn of venture investment, according to the National Venture Capital Association. But exceptional returns achieved during the late 1990s attracted a huge inflow of money. In 2000, $102bn was invested.

The increase in capital far outstripped the ability of the sector to deploy it profitably. Technological innovation may not have slowed, but the number of new patents has plateaued. More money is chasing the same number of ideas, driving up prices and reducing returns.

This is not surprising. Venture capital is essentially an arbitrage opportunity between the different values ascribed to an asset by the private and public markets. Arbitrage opportunities do not last long – capital flows until opportunity disappears.
More here.