It Ain't Broke: The Past, Present, and Future of Venture Capital


  • Steven N. Kaplan,

    1. Neubauer Family Professor of Entrepreneurship and Finance, as well as Faculty Director of the Polsky Entrepreneurship Center, at the University of Chicago's Booth School of Business. Along with his many published papers on private equity and entrepreneurial finance, and on corporate governance and M&A, Steve has been recognized as one of the top-rated business school teachers in the country. He serves on the boards of three companies: Accretive Health, Columbia Acorn Funds, and Morningstar
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  • Josh Lerner

    1. Jacob H. Schiff Professor of Investment Banking at Harvard Business School, and organizes two groups at the National Bureau of Economic Research: Entrepreneurship and Innovation Policy and the Economy. He has written extensively about venture capital and private equity. His most recent book is Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed—and What to Do About It. He has led an international team of scholars in a multi-year study of the economic impact of private equity for the World Economic Forum. He is the winner of the 2010 Global Entrepreneurship Research Award.
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      Chris Allen and Jacek Rycko provided excellent research support for this article. We thank Harvard Business School's Division of Research and the Kauffman Foundation for financial support. All errors and omissions are our own.


This article presents a selective history of the U.S. venture capital (VC) industry, a discussion of the current state of the market, and some predictions about where the market is going. There is no doubt that the U.S. venture capital industry has been very successful. The VC model has provided an efficient solution to a difficult problem—that of enabling people with promising ideas but often limited track records to raise capital from outside investors. A large fraction of IPOs, including many of the most successful, have been funded by venture capitalists, and the U.S. VC model has been copied around the world.

Armed with this historical perspective, the authors view with skepticism the recent claims that the VC model is broken. In the past, VC investments in companies have represented a remarkably constant 0.15% of the total value of the stock market; and commitments to VC funds, while more variable, have been consistently in the 0.10% to 0.20% range. Both of these percentages have continued to hold in recent years. And despite the relatively low number of IPOs, the returns to VC funds this decade have largely maintained their historical relationship to the overall stock market.

To be sure, VC investment and returns continue to be subject to boom-and-bust cycles. But if the recent period has most of the features of a bust, the authors view today's historically low level of commitments to U.S. VC funds as a fairly reliable indicator of relatively high expected returns for the 2009 and (probably) 2010 vintage years. Perhaps the most promising future role for venture capital, as the authors suggest in closing, is to increase the productivity of the corporate research and development function through various kinds of partnerships and outsourcing arrangements.