Venture Capital: Getting Past the 'Winning Company' Approach

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With the initial-public-offering market in a deep chill, and new investments in startups stalled, some investors are questioning whether the venture capital industry's business model is broken. VCs invested just $3.7 billion in startups during the second quarter—less than half of what they invested a year ago and matching the levels of a decade ago, the National Venture Capital Assn. reported July 21.

Others contend that traditional VCs have become too big and unwieldy to spot the best new opportunities. But those arguments, while rooted in financial measures, overlook the fact that venture capital remains an essential way that the U.S. promotes entrepreneurship.

A New Metric for Success

The debate over how to infuse new life into the VC industry focuses almost entirely on financial measures. We look at the size of investment rounds, whether funding is increasing or decreasing, and returns on investment. While important, these measures are too limited for evaluating an industry with the critical function of fostering the development of new companies, new talent, and new business ideas.

It may be time to look for fresh measures of success that go beyond financial metrics, and judge startup companies by technical milestones as well. Success doesn't come to startups solely from large venture investments. The ingredients that go into creating a healthy new company are far more complex. Startups need strong management teams, a killer idea that works as a business plan, and financial backing. Frequently, a venture capital firm's ability to recruit talented people for a startup is more important than its latest round of financing.

The venture capital industry has a wide breadth of talent. Its firms know how to build management teams and recruit effective boards. And they understand the hard work of forming new companies, including marketing, sales, and financial reporting.

Rather than question the relevance of the entire venture industry, the technology sector needs to better tap into VCs' expertise to build new companies, stimulate our economy, and create more jobs. Moving past the practice of betting on a single winner in each product category could be a helpful start.

Fan Munce is managing director in IBM's Venture Capital Group and vice-president for corporate strategy.

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