Ennovance Capital is NOT is VC firm (i.e. Ennovance is a PE investor). However, I could not resist the temptation to share my perspectives on the VC landscape. Currently, numerous venture capital (VC) firms are experiencing the problem of facing end-of-life fund deadlines in a market that has seen difficulties in recent years. Many of the funds facing this problem were created during the dot-com bubble; from 1999-2001, over 1200 venture funds closed on approximately $179 billion. Many of these funds facing end-of-life deadlines retain companies they believe hold much potential and seek extensions of their funds for a year or two; however, many investors in Wall Street would rather exit as quickly as possible and take their losses from venture bubble investments. Apart from loss of potential profits, what are the other possible effects of closing these funds without extensions?
One impact of decreased investment that many neglect to mention is the adverse affect on multifactor productivity (MFP). In economic terms, multifactor productivity is a concept that measures the changes in output per unit of input. In other words, MFP exists when the output is greater than the sum of its input. In real terms, MFP reflects factors such as managerial skill, technological developments, reorganization of production, etc; in essence, it is a measure of innovation. If this venture funds are required to close and let up on companies with significant potential, we would witness a noticeable decrease in MFP, for these funds would be unable to commercialize novel ideas and innovations, create synergy between existing companies, restructure and reorganize companies to operate more efficiently, etc. Many bright ideas and innovations that could potentially transform industries will never see the light of day, which will prove to be a dire consequence towards society as a whole.
Just as Rome wasn’t built in a day, companies cannot be transformed overnight. Although the market as of late, although improving in some regards, has been less than comfortable for investors, they should not give up on funds with potentially valuable assets too quickly. The key questions to ask are: Will novel ideas will remain novel ideas despite capital market conditions? Isn’t innovation made America great? If so, how big of a “real loss” would we see as innovation fades away due to general uneasiness within the market for VC?
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