Why Venture Capital Returns Are Going Up

Venture capital returns are going up.

That is my conclusion from two recent press releases: the 2010 fund-raising data from Dow Jones, and the 2010 review of exits from the National Venture Capital Association. Neither release reads that way but the laws of supply and demand make it, from here on in, pretty inevitable.

Looking first at cash invested into venture funds themselves, the Dow Jones press release shows that funding fell to “a seven-year low” of $11.6 billion in 2010. The real meaning of this becomes clear if you take a much longer perspective and look at venture capital funding over the past 25 years and compare that to the overall size of the U.S. economy. The assumption is that the best way to think about the supply of capital is in relation to the size of the overall economy and thus, the overall pool of likely opportunities.

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