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Downsize Me!

Thom Ruhe, Director of Entrepreneurship, The Kauffman Foundation

When hearing stories of downsizing –  or “right-sizing” as is the popular euphemism of the day – one usually considers large manufacturing, construction firms or even big banks. These are the industries that have recently sustained large job losses due to the global economic collapse or the displacement of jobs to other countries with cheaper sources of labor.

So it is that the latest report released by the Kauffman Foundation (Right-Sizing the U.S. Venture Capital Industry) did strike a curious chord within me as it addresses an industry (venture capital) that has historically been self-sufficient, and shrouded in a mystique of rainmaker for the lucky few entrepreneurs that were deemed ‘good enough’ to receive an investment.

Contrary to this popular belief however, the venture capital industry is not a necessary condition in driving high-growth entrepreneurship. This new study postulates that while venture capital will continue to be crucial to some forms of high-growth companies, the sector’s size must be reduced to be viable. In recent years, the venture industry has seen stagnating and declining returns coupled with rapid expansion in venture capital assets under management.

Perhaps of most significance is the fact that poor returns due to rapid asset expansion predate the current economic downturn. Read the report (PDF) and decide for yourself. And as always, if you have something to say about it, don’t be shy about leaving a comment.   

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