ECONOMY 26 Luring a big ﬁrm to town is not the secret to job growth
DEFEND YOUR RESEARCH 30 Are morning people wired for success?
VISION STATEMENT 32 The social web’s east-west divide
COLUMN 38 Warren Bennis looks back on his surprising path to fame
New Thinking, Research in Progress hbr.org New Thinking, Research in Progress hbr.org
The VC Shakeout
Venture capital hasn’t worked for a decade and must be radically restructured if it’s going to inﬂuence innovation—and make solid returns to investors. by Joseph Ghalbouni and Dominique Rouziès
VC QUARTERLY RETURN RATES, 1981–2009
SOURCE CAMBRIDGE ASSOCIATES LLC U.S. VENTURE CAPITAL INDEX
Cochrane shows that investments in VC portfolio firms did not outperform investments in other NASDAQ stocks during the boom period of the 1990s. In short, the VC business is bad, and there are few signs that things will improve any time soon. We reached out to highly placed VC partners, VC-backed CEOs, and fund managers for wealthy investors and studied the latest data from principle VC industry analysts to understand why venture capital has fallen so far. How did the industry that made computers ubiquitous,
July–August 2010 Harvard Business Review 21
What We’re Watching in...
With Customers, Any Compliment Will Do...
In a simple but striking experiment, students who were identiﬁed as would-be clothing shoppers received an overtly ﬂattering ﬂyer from a ﬁctitious store—“We’re contacting you because you’re fashionable and stylish”—along with a request to visit the store. Researchers Elaine Chan and Jaideep Sengupta of Hong Kong University of Science and Technology found that the tactic was surprisingly eﬀective: The “shoppers” developed positive implicit attitudes—otherwise known as gut feelings—toward the store. It didn’t matter that the ﬂattery was impersonal and that there was a clear ulterior motive. The shoppers were charmed anyway, and acted on those gut feelings by choosing a coupon from the store that had ﬂattered them over a coupon from a similar store. The study indicates that even ﬂagrant ﬂattery can sway customers.
This month we’re looking at ﬂattery and ingratiation, pervasive tools of inﬂuence in the workplace. Across the next few pages, we’ll show why insincere compliments and sucking up are eﬀective—and risky.
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the internet useful, biotechnology practical, and alternative energy sustainable get into this mess? And can it get out?
A Weak Value Proposition
No doubt the venture capital system worked during parts of the past 30 years. Hidden in a three-decade average of 3% quarterly IRR figures are periods of stout performance for VCs. During the golden age of VC investing— the silicon and software era from 1980 to 1997—VCs posted average quarterly returns of 22%. Research by University of Chicago economists Steve Kaplan and Antoinette Scholar found that VC funds outperformed the S&P 500 on a capital-weighted basis over the same time period. But the value proposition of the VC industry toward its two clients—investors and entrepreneurs—has since weakened. For one thing, VC has never recovered
from the commercialization of the internet, which brought a staggering 250% increase in deals between 1997 and 2000 and a quintupling of investment dollars. IRR rose spectacularly, but perversely this attracted too much capital too quickly from too many investors, which in turn funded too many inexperienced VC partnerships competing for portfolio companies. Meanwhile, deal activity has dried up. The total number and value of investments in 2009 reached their lowest...