PRINT THIS PAGE Temporal comparative analysis of the US venture capital industry over 1980 to 2002 29/03/2006. Source: Holon Institute of Technology, The College of Management. Avi Messica and Tamir Agmon 
Avi Messica of the Holon Institute of Technology and Tamir Agmon of The College of Management hypothesise that supply and demand shifts occurred in the US venture capital industry during 1980 to 2002. In this paper, they show the results of an empirical study about the temporal characteristics of the VC industry during the period. The main conclusion is that the VC industry has gone under fundamental transformation in the early 1990s when pension funds started to significantly invest in the sector. As a result, since the early 1990s, the US VC industry has transformed into a supply-driven market. They estimate that even after the bubble burst, the VC industry is still inflated and predict degraded future returns.
1. Introduction
The tremendous growth of the venture capital industry over the past two decades has stimulated a great deal of research in the field. In a collection of celebrated reports researchers like Gompers and Lerner (1998, 2000, 2004) have led the research of venture capital (VC) investments and better insight, into the dynamics of the industry, was gained as more data became available. Moreover, the boom and bust cycle in the US venture capital market in the period of 1998 to 2003 have nurtured much research. Kaplan and Schoar (2003), Ljungqvist and Richardson (2003), Chemla (2004), and Phalippou and Zollo (2005) discussed the performance of private equity and venture capital funds based on large sample and over a long period, e.g. from 1980 to 2003, and just recently Cochrane (2005) has thoroughly studied the return and the risk of venture capital projects.
The VC industry has a special role in the economy and as discussed by Hellmann and Puri (2001) and Jelic et al. (2005) it acts as financial and risk intermediary that is specialized in high-risk investments. As such it bridges the gap between risk taking entrepreneurs and conservative institutional investors thereby generating value through risk intermediation as pointed out by Coval and Thakor (2004). Valuation is a major factor in VC investments. VC firms value a proposed investment opportunity based on its current potential initial public offering (IPO) value had it gone public; or based on its value for a potential acquirer, had a merger or an acquisition (M&A) took place. The exit value and exit vehicles of VC firms were thoroughly studied by Cumming (2003), Cumming and Macintosh (2003), Ranjan et al. (2003), and Cumming et al. (2006).
Much research was devoted to the study the exit opportunities by Black and Gilson (1998), Fleming (2002), Cumming and Macintosh (2003) and Schwienbacher (2003). However, basically the exit is the foreseen terminal value of the deal and therefore it is conditioned on the public market in both cases. Whatever a successful exit is, be it through an IPO or a stock-based M&A deal, we expect the valuations, and hence the returns, to be correlated with the public market.
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