It appears we’ve reached the end of a venture capital cycle. Now what?

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The flow of capital supporting our start-up ecosystem is clogging. At risk is the core activity of venture capital — the conversion of accumulated wealth into innovation. Based on recently released 2016 data, I am concerned.

The strong relationship between businesses that grow rapidly and the availability of venture capital cannot be understated. Over the last 20 years, almost $190 billion have been invested in Internet businesses, while $150 billion were invested in healthcare businesses. Most technology products we take for granted today were fostered in some way by that flow of funding, as were many of the highest-paying jobs in our nation. But that flow must travel in two directions: first to the businesses in need of funds, and then back to the investors as profits. Therein lies the problem.

Last year, investors committed $41 billion to new venture capital funds. This was a 10-year high, and the third-highest annual commitment in history.

Meanwhile, previously raised venture funds deployed $101 billion in new capital to growing businesses in 2016. This was down from a peak of more than $130 billion in 2015. Both years were exceptionally high against historical trends.

Presently, 184 tech start-ups valued at more than $1 billion (so-called “unicorns”) have not been able to return cash to their investors. And, it is not just for unicorns. For all venture capital funded start-ups, the necessary recycling of cash is slowing.

There is a growing disconnect between capital coming into technology businesses, and the ability of the financial markets to provide exits. An exit gives a business owner a way to reduce or eliminate his or her stake in the business — it’s the moment owners and investors can cash in. A recent article in Bloomberg suggested that at current exit activity levels, it could take 14 years for every one of today’s unicorns to provide an exit for their investors. Perhaps they are indicative of a larger, longer-term problem.

Something has got to give. Either exits will need to pick up dramatically, or venture capital investors will be disappointed.

My sense is that we are at the end of long-term growth cycles surrounding the disruption of media and communication, and a corresponding explosion in drug discovery through biotechnology. As emerging businesses disrupted what was there before, much money was made and new market champions emerged.

These new winners have in many instances surpassed their forbearers in market power and economic concentration. Industries such as healthcare, media and software have become highly concentrated and are dominated by a relatively small number of companies.

But now, the disruptors themselves might need to become the disrupted for our economy to grow.

Where will this disruption come from? In software and media, from the acceleration of commercialization of artificial intelligence. Progress in this industry is ever more visible in the cars we won’t drive and home appliances we will turn on through voice commands. In healthcare, it will come from a greater understanding of the human genome and personalized medicine. Soon, useful lifespans will expand for those fortunate enough to afford revolutionary healthcare.

Meanwhile, it’s becoming clearer that for many investments, exits will simply not occur. The venture capital industry must rapidly change its industrial focus to truly invest in what is new and disruptive. Its ability to pivot will be a determinant for how quickly disruption and new growth can occur in our core technology industries.

Failure to make this pivot will result in a continued hindrance in the flow of venture capital, and if it slows to a trickle, our economy will suffer.

Column originally published in Washington Post.


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