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The exception: Google’s successful initial public offering over five years ago did not usher in a new era of good times for venture capitalists; it merely served to underscore how rare these happy events have become.

In the summer of 1996, Silicon Valley venture capitalists put a few million dollars into a telecom-equipment startup called Juniper Networks. Three years later, after a few more rounds of funding and the release of its first product, Juniper enjoyed an initial public offering of shares, or IPO. At the end of its first day of trading, it was worth nearly $5 billion, and within nine months, it was worth almost 10 times that. The original venture investors, meanwhile, were able to walk away with profits of better than 10,000 percent.

Around the same time Juniper went public, Silicon Valley venture capitalists were putting money into a new networking startup, Procket Networks. This time, the initial investments were bigger, and over successive rounds of financing, Procket collected almost $300 million in venture money. Three years after it started, though, the company had still not launched a product, and in 2004 its assets were acquired by Cisco in a fire-sale deal. This time the VCs walked away with just a fraction of their original investments.

The difference between those two stories is, of course, the difference between the world of the late-1990s technology-stock bubble and the world after that bubble burst. But of late, it also seems like the difference between the historical image of venture capital and the harsh reality of the current business. A decade ago, venture capitalists seemed like genuine alchemists, able to turn even startup dross into purest gold. In recent years, however, the industry has seemed less magical than mundane. Since 2004, its average five-year return has oscillated around zero. High-priced IPOs have become rare events, even as VCs have continued to pour tens of billions of dollars into new companies every year. As Fred Wilson, a principal at Union Square Ventures, bluntly puts it, “Venture capital funds, as a whole, basically made no money the entire decade.”

Naturally, venture capitalists have not remained indifferent to these developments. On the contrary, the soul-searching has sometimes resembled Maoist self-­criticism sessions. The word crisis has become ubiquitous. Matrix Capital founder Paul Ferri told the Wall Street Journal in 2006 that the industry does not now have “an economically viable business model.” In the June 2005 issue of this magazine, Yankee Group founder Howard Anderson bid “good-bye to venture capital.” And when the executive search firm Polachi and Co. asked a thousand VCs last summer “Is the venture capital business broken?” more than half said it was. When you consider the key role that venture capital has played in funding American innovation over the last 50 years, that conclusion seems ominous. (For another practitioner’s take on the state of venture capital, see Steve Jurvetson’s Notebook “The Pace of Innovation Never Falters”.)

Some of this breast-beating is, to be sure, inevitable. Booms and busts have been endemic to the venture capital industry since it was founded in the late 1950s. As Harvard’s Josh Lerner puts it in Boulevard of Broken Dreams, his new book on the history of public efforts to boost venture capital, time and again “groups raised huge amounts of capital that they invested foolishly, either funding entrepreneurs who never should have raised capital in the first place, or else giving far too much money to promising entrepreneurs.” (See “Publicly Funding Entrepreneurship” Lerner’s Notebook on the government’s recent efforts to spur innovation.) And the busts that follow those frenzies tend to engender profound pessimism–in 1994, just before the boom of the late 1990s, Paul Gompers, then at the University of Chicago, published a major study of the industry titled “The Rise and Fall of Venture Capital.” Given that we’ve just lived through the bursting of two asset bubbles, and that the stock market–the traditional exit for venture capitalists–has gone nowhere in 10 years, it would be surprising if people weren’t gloomy.

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