Why the next big ideas might not get money they need — Jean-Noel Barrot

MIT Sloan Assistant Professor Jean-Noël Barrot

MIT Sloan Asst. Prof. Jean-Noël Barrot

From WSJ MarketWatch

Concern is mounting that the venture-capital model might be broken. Returns have been relatively poor in the past decade. More importantly, perhaps, the innovation outcome has been somewhat disappointing. As PayPal cofounder Peter Thiel complained, “We wanted flying cars; we got 140 characters.”

One key reason for this might be the way venture-capital funds are typically structured. Such funds have been organized for decades as limited partnerships, raising commitments among external investors to be invested and returned within 10 years.

This 10-year horizon is somewhat arbitrary. It was initially used by partnerships formed to develop real-estate projects or explore oil fields. In the 1950s, the first venture funds adopted the template of these partnerships. Virtually all funds are now organized this way, irrespective of their investment targets. While this contractual structure might have been perfectly suited to fund the waves of innovations of the 1980s and 1990s, it might not be appropriate for the long-term innovations that are emerging today.

Read the full article at MarketWatch.

Jean-Noël Barrot is an Assistant Professor of Finance at the MIT Sloan School of Management.

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