One of the reasons that venture capital firms have invested less in start-ups is because institutional investors are hesitant to invest in venture capital firms in the wake of the financial crisis, according to the NVCA. Traditionally, institutional investors – such as pension funds and endowments – invest in venture capital firms, who in turn fund start up companies. Without the backing of institutional investors, it is difficult for venture capital firms to maintain their investments in start-up companies.
According to Mark Heesen, the president of the NVCA, “For the past three years, the venture capital industry has been investing significantly more dollars into companies than it has been raising from institutional investors. This level of investment cannot continue if we do not start to see a pick-up in exits and, subsequently, fundraising.”
The stagnation of US venture capital has contributed to a steady narrowing of the once-considerable gap in performance between US and UK venture capital firms, aiCIO reported in June. The report focuses on a study entitled “Atlantic Drift: Venture Capital Performance in the UK and the US,” which concludes that the worsening performance of US funds – not an improvement in UK fund performance – is the reason for the narrowing gap.