· Problems with VC model:
· Too much capital is invested in the VC industry
· Funds invested in low-quality firms
· Such investment reduced the yield for the funds
· Professional issue: the funds recruited managers from high-tech fields and not past entrepreneurs
· VC funds are losing deals to angels that have better relationships with entrepreneurs
· Internet and software companies don’t necessarily need VC funds in order to develop and grow
· In the past decade, the IRR, or the main index for measurement of VC performance, was very low – a one-digit figure, and in some cases was even negative.
· The research by Josh Lerner and William Kerr from Harvard concluded that companies founded by entrepreneurs who receive funding from business angels survive at least 4 years and show better performance.
· The entrepreneurs are not ready to give high equity percentages to the VCs in exchange for moderate or high investment. Israeli funds did not succeed in keeping a high percentage of equity which allows them to keep the high yield they have earned in the previous decade
· At the moment, it has been estimated that the VC industry is only returning about 1.6 times the money invested in it, what’s translated into the annual IRR of 10%
· VC industry is reducing in size; some say that there’s been a 50% reduction in the U.S. In Israel this process has already started: from 70 VC funds in 2000, at the moment, a limited number of the Israeli VC funds remained, among which are Pitango, Genesis, Gemini, Evergreen, JVP and others.
· From 700 VC funds currently active in the US, in 2015 only about 200 are expected to be able to invest funds.
· The main problem of the industry is its ability to provide normal yields for the financial institutions, which are the main source of their funds
· In the current economy, no doubt that in some cases the angels are filling in the roles that in the past were performed by the VCs
· The Internet industry has created a phenomenon, in which the company has the ability to arrive to sales and balance with investment lower than a few hundred thousand dollars.
· Lack of talented engineering workforce stalls the high tech economy in Israel; an investor first and foremost must worry about providing adequate workforce for the venture
· Despite the crisis there is no problem with demand and supply in the VC industry. The innovation has not stopped for a moment; the market penetration has become cheaper and cheaper and many companies are able to commercialize their products relatively fast. However, in order to build large stable companies, a much higher investment is needed, the one normally provided by the VC industry. In this case, it is unclear why the VC industry has not succeeded. Mainly this is the result of an inherent flaw with the industry model. Apparently, the price which the VCs require from the financial institutions in order to ensure the return vis-à-vis the risk of the investment is too high – the price that the financial institutions are not ready to pay any longer.
· Since the VCs are normally the financial intermediary between the investment and the startups, just as the banks are the financial intermediary for small and medium businesses, due to the failure of the VC model, the start-ups ultimately suffer, as well as the whole high-tech market and tens of thousands of people employed by this industry in Israel.
· The long-term solution to the VC problem needs to be a significant change to the VC model, make it more efficient
· The “carry” model of revenue sharing is not sustainable: the VCs need to understand that they are financial intermediaries, and as such rely mainly on the management fees
· Operation of the Israeli VC funds (according to Calpers Reports)
| Fund | Year of founding | Yield in 2009 | Investment multiple |
| Carmel 1 | 2000 | 6.6% | 1.3 |
| Pitango 4 | 2004 | 4.2% | 1.1 |
| Carmel 2 | 2005 | 6.4% | 0.9 |
| Gemini 3 | 2000 | -2.2% | 0.9 |
| JVP 4 | 2001 | -3.5% | 0.8 |
| Carmel 3 | 2008 | -41.2% | 0.6 |
| Pitango 3 | 1999 | -6.9% | 0.6 |
| Israel Seed | 2000 | -14.8% | 0.5 |
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