I just read a rather compelling argument at WSJ.com by Foundation Capital general manager Adam Grosser who argues that the venture capital industry could literally disappear unless changes are made in our economy.  He claims that not only are our banking institutions losing interest in underwriting the smaller IPOs that provide exit opportunities for seed-stage investors, and access to public capital for these smaller companies, but that buy-side investors are also losing patience with the often slow growth of the IPOs they invest in.  He says:

Historically, buy-siders have understood and accepted that most economic value isn’t created until five years after a company’s IPO. But now, a focus on unfavorable current EBITDA multiples is displacing long term predictors of success such as market size, growth rate, technology and management experience.

Those of you who know me, know my views on long-term vs. short-term growth as a measure of value.  Unfortunately, the markets severely punish corporations that do not consistently post increased quarterly earnings much more than reward those who experience consistent long-term growth.  Consequently, CEOs of some public companies are constantly pressured to ensure that those quarterly earnings reports are desirable, often at the expense of long-term growth or creation of true value.  Unfortunately, much of this attitude is in fact beginning to affect the small-cap corporations as well (as alluded to by Mr. Grosser).  Generally, venture capital firms make their investments without expecting to really cash-in until 5-10 years later.  This long-term focus has generally paid off in the form of much better performance than the various stock indexes.

VC funds also tend to focus on markets with high growth or great potential for such growth.  Accordingly, capital is often pumped into new, experimental technologies that show promise of great success.  Making venture investments in yet unproven companies and/or technologies requires the vision and foresight to anticipate where markets are headed and the future receptivity of advancement; basically, fund managers take a promising technology or idea with a viable business model and follow their “gut-feeling” as to how things wil turn out.  This [risky] approach to investing has the ability to fuel the fire of innovation in this country and around the world.  U.S. history is full of “garage” innovators, and many of today’s large industries were built from the ground up… why can’t that happen again? 
(Answer: It can.)