Scott Dig took a stab recently at explaining the plight of venture capital companies in terms of broad historic trends and I thought his take on the issue was interesting - especially when contrasted with opinions like this one over at Red Herring.

The venture capital model remains broken after never fully recovering from the dot-com bust at the turn of the century, a long-time venture capital and private equity player said Thursday.

"Nine years later, there's still no venture capital industry, as far as I'm concerned," George Siguler, co-founder of Siguler Guff & Co., told an audience at the Buyouts East conference in New York City. "Ten thousand companies were funded at the height of the Internet bubble. Now we're not seeing any [investor exits]."

Scott takes a somewhat different view on his blog than Siguler does at Red Herring. He talks about venture capital investment this way:

...as a long-term asset class, venture capital is nothing special, really. On average it performs much like any other asset class; however, it has much more risk flowing through its veins.

So how does Scott explain the current dismal state of venture capital? Regression to the mean. Just like every other financial sector (each on their own calendar or cycle), venture capital overreacts to short-term news and then under-reacts while awaiting new short term news. That, according to Scott, pretty much sums up the dot-com era and the situation we're in right now.

You can think that venture capital is dead, that it will go away and never return. But it's more reasonable to assume that the pendulum will continue to swing.


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