Silicon Insider: Bubble Memory

Nov. 2, 2007 — -- For all the talk about a new Internet bubble, the facts don't agree.

The U.K.'s Financial Times newsletter recently had a very interesting chart, based on data provided by the National Venture Capital Association. To give you a quick explanation: the chart has quarter-by-quarter measures of the returns on venture capital investments over 5, 10, and 20 years.

Venture capital funds pay out over a long period of time as the companies in which they invested fade away, are acquired, or go public. Not surprisingly then, the 5-year return shows the most sinuosity -- reflecting the fact that these investments are still highly volatile, with the measure largely dominated by high fliers and the short-lived. By 10 years, most funds have pretty much matured and are moving towards the industry mean, which is pretty well reflected by the 20-year return rate.

Now, let's take a closer look at each of these curves in turn. First, some good news. A nice horizontal 20-year line underscores that venture capital funds are among the best investments around -- if you've got a minimum of a quarter-million burning a hole in your pocket -- holding at a nice steady 16.4 percent (and, if you are a real risk-taker, the number jumps to 20.6 percent for early and seed-round investments).

But just as important, this flat 20 year curve is a reminder, which we veterans tried to point out during the dot.com crash of 2000, that over the long term the boom-bust -- even the bubble-crash -- cycles of high tech tend to balance out.

Places like Silicon Valley, which are perpetually accused of either being out of control or in their last days, always eventually return to the norm of innovation, entrepreneurship and strong growth. I often think of all of those people who bailed out of the Valley in 2001-2002, believing that the good times were over forever -- supported in their hysteria by far too many of my fellow journalists. How many fortunes were lost by folks who would now be working for Google or Facebook or Photobucket?