Getting Venture Capital Back on Track

The House and Senate recently passed the Jumpstart Our Business Startups (JOBS) Act, a piece of bipartisan legislation initiated by House Republicans that will help right the U.S. venture capital industry. And they did it in a presidential election year no less!
To grasp the importance of this legislation, you have to be aware of the moribund state of the U.S. venture capital industry. For the past decade, the industry has been in decline. In 2010, the real dollar amount of money the industry raised from its limited partners was 44 percentof 2001 levels; the number of active venture capital funds was 63 percent; and the number deals venture capitalists undertook 73 percent .
The industry’s shrinkage has hindered U.S. economic growth and employment. Venture capital-backed companies produce 21 percent of U.S. GDP and 11 percent of employment in the private sector, despite accounting for less than 0.2 percent of all businesses, according to estimates by IMS Global Insight.

In the world of finance, poor returns lead capital to flow to other asset classes, which it has done with a vengeance.

The industry’s decline comes in large part from its poor financial performance. Cambridge Associates reported that the net ten-year “end-to-end pooled return” to the industry’s limited partners was only 2.6 percent in September 2011. In the world of finance, poor returns lead capital to flow to other asset classes, which it has done with a vengeance. Last year, the industry managed 56 percent of the inflation-adjusted amount it managed in 2001, its peak year.

Read more: http://www.american.com/archive/2012/march/getting-venture-capital-back-on-track