Venture capital growing pains: Should the market diet?

This paper examines recent trends in the venture capital market and current research that explores the impact of these trends. High returns in the venture capital industry caused by the surging market for venture-backed initial public offerings and recent reductions in the capital gains tax rate have led to dramatic increases in venture capital commitments. This rise in fundraising has had dramatic effects on various segments of the venture capital market which may indicate overheating. The terms and conditions of venture capital limited partnerships have changed reflecting the growth in demand for venture capital services. The share of profits retained by venture capitalists has increased while the restrictiveness of the partnership agreements has eased. Venture firms are raising substantially larger funds with increasing pressure to find investments, thereby moving to later stage investments. The price of investments has also responded to the growing desire to increase investment. Finally, institutional investors are increasingly looking internationally for new investment opportunities in venture capital to avoid potential market excesses. (C) 1998 Published by Elsevier Science B.V. All rights reserved.