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Some say the model is broken. Others say the industry is merely going through a healthy bout of restructuring.

Only one thing is certain: it is hard being a venture capitalist these days.

“This has been and always will be a hits driven business,” says Steve Jurvetson, a partner at Draper Fisher Jurvetson, a venture firm whose investments include Baidu, the Chinese internet portal, and Skype, the internet telephony group.

Today, however, big hits are hard to come by. The huge amount of money poured into venture funds over the past several years means there is a lot of capital chasing a finite number of good ideas.

Meanwhile, a difficult environment for initial
public offerings – driven by Sarbanes-Oxley – has robbed the venture industry of its most lucrative exit route.

While most would agree that the venture business is going through a difficult period, there is little agreement about what should be done about it.

“For some time, we’ve felt there was something rotten in Denmark,” says Steve Dow, a partner at Sevin Rosen Funds.

Sevin Rosen lobbed a
rhetorical bombshell into the debate over poor returns in the VC industry last month when it said it would return millions of dollars in
commitments secured from limited partners who had agreed to participate in the firm’s latest fund.

In a letter to its investors, the firm pronounced the
traditional venture capital model “broken” and said it wanted to take time to find a new way forward before it raised another fund.

The statement drew a spirited response from rivals. “The model is not broken. Unequivocally,” says Joe Schoendorf, a partner at Accel Ventures and one of the industry’s most seasoned investors.

Mr Schoendorf says the industry is in its fourth downcycle since he first came to the Valley in 1966. “This one is probably not yet as bad as the one in the 1970s. The one in the 1970s lasted a decade. We had such an excess and what you are going to see is a lot of people who can’t raise their next fund.

“We are starting to see that right now.”

Mr Dow insists that Sevin Rosen’s decision to return its fund had nothing to do with an inability to raise money. “I don’t think anybody has a problem raising a fund in this environment,” he says.

Whether it is a sign of deeper problems in the industry or not, Sevin Rosen’s suggestion that there is something wrong with the VC business model has clearly touched a nerve.

Mr Jurvetson at Draper Fisher Jurvetson says
venture capitalists need to look beyond their traditional stomping grounds if they are to thrive in the present

“Does the model need to change? The answer is yes but in a completely different area – expanding inter-nationally. As we look back over the last six years, the lion’s share of gains have come from China. Next would be Europe.”

By recruiting home-grown teams of partners in China and elsewhere, DFJ hopes to develop a network that can point it to the best opportunities – wherever they may be.

Mr Dow says a lack of opportunities is not the problem. “There are lots of [places] to put money,” he said recently. “This is a discussion about an industry and an asset class which has focused too much on putting money to work and not enough about how to create returns.”

Some VC groups are already experimenting with alternative business models. “We all have to figure out how to make more with less,” says George Hoyem, managing director at Blueprint Ventures, whose business model is based on launching start-ups spun out of engineering projects at big Valley companies.

Maha Ibrahim, a partner at Canaan Partners, says the recent downturn is dividing the business into the “haves and the have-nots”. But she is confident the industry as a whole will continue to thrive.

“At the end of the day, there is going to be an appetite in Silicon Valley for innovation and for the entrepreneur,” she says.

“As long as that exists, early-stage ventures will exist.”

Copyright The Financial Times Limited 2019. All rights reserved.

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