Venture capital market has gotten too big for its britches

Small business startups looking for business financing from venture capitalists may get less than they expected, with the depressed venture capital market causing VCs to scale back their investments.

The Ewing Marion Kauffman Foundation recently published a study finding that five-year venture capital return performance has been declining since 2004, after the dot-com bubble burst.

One of the likely culprits, according to the Kauffman Foundation, is that startups are being given too much venture capital money, which can lead to higher valuations and lower exit multiples.

"The big financiers of venture capital are force-feeding the industry, and it's like force-feeding cows - it makes the industry sick," Paul Kedrosky, a senior fellow at the Kauffman Foundation, told the news provider. "It's a returns-driven business, and the only way you can post better returns is by shrinking."

The Kauffman foundation expects the venture capital market to decline to half its current level in the years to come, to set pace with falling GDP levels, poor returns, and the weak exit market.

Many venture capitalists agree and are scaling back their investments by millions of dollars, reported the New York Times.

The worry is that the venture capitalism has fallen victim to bloated investments and older partners that have fallen behind in technological advances, the paper reported.

Less than 1 percent of new employer businesses created annually in the U.S. are financed by VCs, according to the Kauffman Foundation.