From the mouths of the investors themselves: The tech start-up world is worse at building successful companies than it used to be. Fred Wilson, a prominent (and successful) venture capitalist, who invested in GeoCities, Twitter, Zynga, and Foursquare, gave the cold, hard truth saying in an interview with Technology Review's Rachel Metz that "a lot of venture capital firms are having a tough time raising money ... because the returns haven't been very good in the venture capital industry for a long time." He isn't talking about the personal wealth of venture capitalists, who often structure their deals so that they can make money for themselves even if their investors don't. What's at issue here is, rather, the ability of venture capitalists to pick the right companies, a point that angel investor Dave McClure reiterated in less nice terms. After calling VCs "insufferable, arrogant, fucking assholes" before going on to make his point that they "don’t make bets early enough; have no idea what makes a good product and don’t know how to build communities," writes GeekWire's John Cook, reiterating a talk McClure gave at the GROW conference.
The data backs up McClure's point. The money doesn't end up catalyzing super successful companies. According to a recent report that looked at 20 years worth of investments "Only 20 of 100 venture funds generated returns that beat a public-market equivalent by more than 3 percent annually, and half of those began investing prior to 1995." And that was just one of the jarring statistics they found, concluding partners often "invest too much capital in underperforming venture capital funds on frequently mis-aligned terms." Since the dot com crash, VCs really haven't seen high-risk, high-reward returns, as the chart below from a recent paper shows. In short: "Before the dot-com bubble burst in 2000, VCs did amazingly well," explains Noah Smith, a finance professor, on his blog Noahpinion. He spotted this chart in a paper [PDF] looking at private equity performance that compared VC returns to simply buying stock index fund and was shocked by the flat-lining of VC returns after the dot-boom of the late 1990s. "In the decade since, they've done slightly worse than the S&P 500," Smith writes, "in other words, they've done so poorly that you'd have been better off buying Ye Olde Vanguard 500."
Part of the reason for this drop off in returns is the idea that the vcs don't know what they are doing, which is McClure's line of thinking. "But really it is all about VCs failing and failing to return capital and being f**king idiots. VCs are stupid. They are absolutely stupid. Does anyone want to challenge that statement? Does anyone think that VCs are not stupid?" he said. (Of course he would think that since he is an angel investor.) The problem, he thinks, is that VCs want huge Facebook Peter Thiel style returns, but that's just not realistic. He sees angel investment as the future. And, surprisingly, so does Wilson. "One of my hopes is that as there are more angel investors out there, and the amount of money it takes to make a company successful comes down, entrepreneurs are going to have more options," he told Technology Review.