Venture capital myths
Is there really a ‘shortage’ of venture capital? If so, where is the evidence?
If there is a problem, is this something that government can/should try to solve?
Asking start up founders if they would like more money is not evidence – it is just proof of unmet demand.
Proper consideration of the supply side of the equation leads to the strong inference that the issue is bad returns. The capital markets are reasonably efficient and highly competitive. If there really is an acute shortage of venture capital, then existing venture capital investors should be able to ‘name their price’ and thus should be able to make healthy returns. If venture capital investors were making healthy returns, capital chasing these returns would flood into the space.
The reason that there is no more venture capital is that returns from VC investing have traditionally been weak – it is easier to make higher returns with less risk in other areas of the capital markets (including other areas of private equity).
The lack of venture capital is therefor not a market failure that government should fix – it is the market screaming out ‘returns are lousy, so capital is tight’.