Asset allocation

The rebirth of VC (really!)

October 7, 2010: 2:23 PM ET

Venture capital isn't mired in a new normal. Instead, it's on the verge of a cyclical upswing.

By Roger Ehrenberg, contributor

To most, the world of venture capital appears to be in the midst of chaos. Poor 10-year returns. Many bloated GPs. The super angel/micro VC "phenomenon" (if it can be called that). Rumors of collusion. A largely closed IPO market. Stock market uncertainty. An uncertain regulatory climate. And on and on. A crazy time to be a venture capitalist, right? Well …

I contend that venture capital, like every other asset class, moves in cycles. It's only that most of our perspectives are so short that we tend to lose sight of the fact that what appears to be "historic" is, well, ordinary when viewed through a longitudinal prism. But as is the case with self-correcting systems, it will, in fact, correct (and likely overshoot as trend-shifts generally do).

Poor 10-year returns make raising funds more difficult as limited partners get skittish. This is both a function of most institutions looking in the rear-view mirror as it relates to asset allocation and the PR risks of maintaining large exposures to a current downtrodden asset class. This is exacerbated by the liquidity problems of many institutions who over-weighted alternatives without really modeling cash needs in an Armageddon scenario (like the one we had).

The data bears this out. As capital flows out of the asset class (notwithstanding all the hubbub about angel financing), those with the intestinal fortitude and the discipline to stay in the game have the opportunity to enjoy out-sized returns. So to be in the game now with dry powder is a good place to be if your investment selection is good and you possess the ability to maintain, and perhaps increase, ownership over time.

Read the rest of  this post in Fortune Finance

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