Innovation is the life-blood of venture capital. Whether the innovation is in marketing, business model or the product itself, the principle of venture funding is to identify that novel spark that disrupts markets and delivers supra-normal returns – albeit accompanied by abnormally high risk.
But for an industry focused on innovation, the business model of a typical venture fund has remained remarkably consistent for more than a generation. The majority of funds today, and for the last several decades, raised a fixed term fund, charge a management fee off the top, and then find exciting portfolio companies to invest in and earn a percentage of the upside that they generate.
Asset-centric investing is only the first step on a road to improved returns for life science investors
Not only is the model pervasive, but the “2 and 20” formula, referring to the 2% management fee and 20% carried interest, has also stood the test of time. For a limited partner seeking to invest in another venture fund, there is plenty of competition in terms of track record of the fund management but remarkably little in terms of the basic business model behind the funds.
Given the performance of the sector as a whole – across life sciences and tech the median funds scarcely return the money invested after accounting for the management fee – one is forced to ask if there is a better solution.
DrugBaron asks whether the shift to asset-centric investing pioneered at Index Ventures might actually be the foundation for yet more innovation in the venture capital business model, yielding a step-change in returns for all concerned. Looking into the crystal ball reveals VC funds that look very different to many alive today.