This link is to a video interview of a researcher who looked at the return on investment provided to investors in VC funds. She showed that investors would have done better if they had put their money in a low risk, low cost, and liquid index fund. Investments in VC funds are high risk, high cost, illiquid and they produce a lower net return than the the Russell 2000 index. (Some funds may have performed better than the industry as a whole, but its hard to predict future performance based upon past performance.)
VC investors did very well in the dot.com boom. The VC's were able to take almost any firm public and make a killing with the IPO. The public was willing to invest in almost any IPO during the boom. It is more difficult today to take companies public that have no history of earnings.
This research puts another dagger in the heart of David Brook's fairy tale about the role that financiers have played in the economy. The VC's are not any better at allocating resources to their most productive use than private equity managers. The VC's and private equity manager's do much better than their investors. They earn large fees no matter how the investment performs. Of course, who needs research when one can quote magazine articles to prove a point? Dick Cheney, when he was Vice President under George Bush, used to leak information to his sources in the print media. He would then quote the published report as evidence in support of his policies. That is not any worse than quoting the National Review or the WSJ opinion page to prove a point. One fiction is as bad as another fiction.
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