Puttin’ on the Hits (Part 2): The Implications of Hit Centric Investing for VC Fund Performance

In Part 1 of this post, I agreed with Jack Myers’ opinion that a hit-centric mentality continues to pervade the investment activities of many venture capitalists. This hit-centric view emphasizes the identification of a tiny number of blockbuster hits at the expense of underwriting large numbers of high-risk ventures that fail. It is a perspective that VC Peter Rip has referred to as “fund twenty, pray for two.” The view emerged gradually among a number of VCs during the bull markets of the Roaring Eighties, and became ingrained among many, if not most, early- and multi-stage VCs during the Long Boom of the 1990s. 

I believe that hit-centric venture capital is the largest elephant in the room when VCs, LPs and industry analysts ask the question: is the VC model broken?  

Puttin’ on the Hits (Part 1): Has Venture Capital Become a Hit Factory?

A few years ago, even before the wheels had come off the tech recovery of 2004 to 2007, I was struck by some observations made by Jack Myers, Peabody award winner, Academy-award nominee and media analyst. Basically, Myers described what he saw as the growing resemblance of contemporary venture capital activity to the failed “hits system” that had long dominated the entertainment industry:

Web 3.0, Why VCs Should Care, and What We Will Find There

Not long ago, John D. Sutter posted a little piece on CNN’s SciTechBlog entitled “What is Web 3.0, and Should You Care?”  In the post, TechCrunch’s MG Segler is described has holding the view that “Web 3.0 isn’t worth defining yet because the next phase of the Internet won’t come until the economic recession lifts and investors start pushing cash back into tech companies.”

While reporter-bloggers can be excused, or perhaps even complimented, for punting on a question like this, I don’t believe that active VCs are afforded the same luxury.