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Picking Venture Capital’s Biggest Brain

OZY spoke to Harvard Business School professor Josh Lerner about the state of venture capital today “and discovered that, though the U.S. is still top-shelf on VC leadership, we might take a page out of Singapore or New Zealand policymakers’ books.”

Ent9961On the venture capital industry: “There have been some very dramatic changes. In the last decade, we saw an extremely profound drop in terms of activity — the financing dropped off, valuations — and that’s been followed by a very dramatic recovery in the last few years. Today, compared to the first tech boom, one of those changes has been the decrease in the amount of money that businesses need to raise to get started.”

“A second change at play has been the quite dramatic bifurcation in the venture industry. Historically, in venture capital, if you looked at the distribution of firms, you saw a familiar-looking bell shape. Now we have a bimodal distribution: twin peaks. On the one hand, there are very small groups that have been able to raise a lot of capital in a very small realm of the industry. And then there is a whole family of funds that collectively represent a very large amount of money. Where you’ve seen the suffering has been in the middle. And many are suffering from the fact that they’re not as targeted and niche or boutique, but also don’t have the global brand and reach that the mega-funds do.”

“The third change has been the rise of individualized entrepreneurial finance: angel groups, the emergence of crowdfunding and the like. All that activity has been enabled by information technology.”

On what worries him: “With all these dramatic changes … sure, there are questions. How well does this trend of individualized investing — that individualized entrepreneurial finance — work? We have angels and angel groups jockeying. And it still remains to be seen how good they are in terms of investing in companies and so forth. It’s an important question that we don’t really know the answer to yet.”

“And then the fact that more and more money is concentrated at either the very, very high end or very low end of size spectrum. Will the secret sauce that makes VC so successful work as well in a multibillion-dollar firm? With this proliferation of those multibillion-dollar funds … well, this is sort of a cramped activity. And can it be industrialized and scaled out, or will it end up being a lot less successful?”