Things aren’t so sunny in Silicon Valley. For the first time since Jimmy Carter was in the White House there were no venture capital-backed IPOs in the second quarter. And VC-backed M&A deals were down 42% from the same period last year. Sure, the weak economy and crummy stock market bear much of the blame. Even so, VC firms should consider returning money to investors. Trouble finding the exit door certainly isn’t accompanied by a lack of funds. VC firms currently manage $257 billion, according to the National Venture Capital Association, 14% more than in the 2000 technology heyday. Investors made some $40 billion of new commitments to American VC firms in 2007, and more in the first quarter.
Yet, fatter coffers haven’t meant bigger gains. The median return on invested VC funds has been negative in six of the past 10 years, according to pension fund adviser Cambridge Associates. Sure, VC bets take a while to pan out. Still, the best year of the past decade, 2002, returned 6.3%.
Investors remember the money-minting VC industry of the late 1990s. But today’s VC firms are not putting all their cash to good use. Commitments to VC firms have been larger than their investments for the last three years by a cumulative $20 billion. So there should be room to return capital to investors. Reducing capital won’t alone bring back the glory days. VC is a play on technology booms. The typical investment is very speculative—with one dazzling success making many small failures worth it. Still, returning capital to investors now will make VC firms better placed when the next boom comes.