At a time when venture capital, as an asset class, is not generating the returns it promises over the long haul (who wants fixed income returns for venture level risk?), it’s important to reconsider its structure and forms of value.

Our friend David Dove makes some excellent points in his PYMTS whitepaper, “Venture Capital’s Role in Payments Innovation.”  He argues that VCs would likely do better if they were really experts in the area in which they invest (true not just in payments, I surmise). On the other hand, he claims that companies would be well served to invest in innovative startups to stay on the cutting edge themselves.  Not just that, but that big companies are typically not great early stage investors.

In our own experience, we see this true more often than not: large companies who have made early stage “venture” investments end up unable to monitor the investment OR take advantage of whatever learnings they might derive.  This situation is a lost opportunity for both investor and investee.

I’m sure smarter VCs than I have opined about this ad nauseum, but it seems to me that in addition to lack of expertise, and perhaps simple laziness, there are some structural issues that venture capital, as an asset class, needs to wrap its head around:  Exits into strategic acquirers can be great, but seldom pay out like a successful IPO. A slowing IPO market (even ignoring the current recession) compromises the grand-slam dimension of venture-stage private equity.  Currently, there is also over-exposure to venture and PE.  Cash is king, and our long-term instruments (which may need to be longer vs. shorter) are not attractive today.

Like David, we try to offer our LPs a window into innovation, in addition to promising excellent returns.  In our case, Core Innovation Capital’s focus is on fin-tech targeting the underbanked consumer market, and we also measure the positive impact on the lives of the underbanked. And these extra-financial forms of value are not an excuse for sub-par financial returns.