What’s Really Going on in the VC Industry? What Does it Mean for Startups?

Posted on Jul 16, 2010 | 96 comments


Lots of discussion these days about the changes in the VC industry.  Here’s my take:

1. The VC industry grew dramatically as a result of the Internet bubble - Before the Internet  bubble the people who invested in VC funds (called LPs or Limited Partners) put about $50 billion into the industry and by 2001 this had grown precipitously to around $250 billion.

2. But VC is an “illiquid asset” so funds didn’t disappear quickly - In 2000/01 the stock market quickly adjusted punishing investors in the NASDAQ and in individual public technology stocks.  Consumers pulled their money out of these risky investments, but when LPs make commitments to VC funds they make 10-year, legally binding commitments. So as of 2008 total LP commitments were still at nearly $250 billion.

3. The VC industry in shrinking –  Paul Kedrosky was early on the scene with this prescient prediction that the industry would shrink.  What accelerated this was the collapse of the public stock markets.  LP’s who invest in funds are typically university endowments, public & private pension funds, insurance companies, large corporations and very high net worth individuals called “family offices.”  To give you an indication of how bad, for example, university endowments are suffering check out this chart.   You’ll notice that Harvard lost 30% of the entire value of its portfolio.  If you’re interested to read a more detailed piece on how they think about this check out.

So the people who invest in VC funds have two problems.  One is the “denominator problem” which says that if an LP invests X% (the numerator) into “alternative investments” such as venture capital and if their total amount available to invest (the denominator) goes down by 30% then the amount they allocate to VC will by definition need to go down by 30% to stay the same percentage.

The second problem is more troubling.  The VC industry has performed terribly over the past 10 years.  Many firms didn’t even return LPs their original money let alone a profit.  So even within the “alternative class” our LPs are looking at other asset investment choices such as distressed buyout funds, private equity or hedge funds.

VC will shrink.  Oh yes it will.

4. This means that some funds will disappear – Returns are not even.  The top quartile funds have performed well. [side note: our last fund at GRP Partners is currently ranked as the 5th best performing fund of the year 2000.  Our current fund was raised in 2008/09.]  Many funds have not performed and will start to disappear.  This is finally happening because the boom of 1998-01 means that many funds are reaching the maturity of their 10-year funds [strangely, 10-year funds usually last about 13 years!].

The best and most consistent funds in Silicon Valley (e.g. Sequoia, Kleiner Perkins, Accel) can and will easily raise money.  But even great funds that are not in this historic and long-established funds will not find fund raising easy.  This is best told in this amazing and brutally honest piece by Alan Patricof where he talks about the recent difficult fund raising experience at Greycroft [they just raised a $130 million fund].

I was at dinner with a large LP and mentioned that I had heard the industry would shrink by 50%.  She laughed and said, “Our predictions are for a much larger drop.”  Gulp.

5. Funds that raise money will be smaller - There is not only less money going into the VC industry, those that raise funds are often raising significantly smaller funds.  Some funds like Battery Ventures have bucked the trend by raising $750 million.  Others will, too.  But my conversations in the private corridors on Sand Hill Road in Silicon Valley is that many fund sizes will be smaller going forward.

6. This is producing a game of musical chairs –  You know: the music is playing while 8 partners walk around a circle of chairs.  The fund size shrinks by half so half the chairs disappear.  The music stops.  Partners leave the industry.  Some partners don’t have to walk – they just sit down while the music is still playing and therefore other partners need to go.

But equally some partners joined firms in 2000 and have still never seen any upside in cash since their funds haven’t yet returned the initial capital [note: VC funds usually return all of the capital that they raised first and then share 20% of the profits above this hurdle].

I suspect both were at play in Rustic Canyon Partners that went from a $500 million fund to around a $200 million fund.  PE Hub reported that there were defections and the implication was that the fund was “fighting for its life.”  I don’t think this is accurate.  There are some very talented partners remaining at Rustic Canyon and I’m told some committed LPs.  But I also know that some of the partners who left were also very talented.  PEHub followed up their analysis with this.  Think about the math.  It was clearly a game of musical chairs in some cases and in others a case of talented people believing they could make more money in a different job.  After all, most people don’t understand that “venture capital is a get rich slowly” scheme.

7. It takes less to start a business these days – We all know that it takes less to start a technology company these days.  You don’t need to buy hardware – there’s Amazon AWS.  You don’t need to buy expensive software – there are free open source solutions for nearly everything.  You don’t have to hire as many sales people because much can be sold online.  So companies are running for the first 1-2 years on significantly less capital than they did 10 years ago.

8. So super angel and seed funds are proliferating – As a result there has been an explosion in the number of amazing early-stage investors such as Softtech VC, Floodgate, Felicis Ventures, K9 Ventures, OATV, Lowercase Capital, Founder Collective, and many, many more.  There are also super angels that are so numerous I’d rather just link to the best list out there, which is VentureHacks’ AngelList.

9. And VC’s are doing earlier stage deals – And we all know that VCs are doing earlier stage deals.  The most notable is First Round Capital who built their entire fund and model around this type of investment and the notion that exit values in the future will be lower than they were 10 years ago.  They are also the most innovative new fund to enter the market in the past 10 years in my opinion.  There is also True Ventures that does early stage, seed investments.  And of course Foundry Group, Union Square and a whole host of other firms including my own.  I have written more in depth on this topic in the past.

10. This is producing a “boomlet” or a bubble in early-stage investing.  That’s OK. – This massive increase in seed & angel funding caused Paul Kedrosky to predict that there is a coming seed fund crash.  I don’t know whether there is a “crash” coming per se but I do believe that too much money is going into angel and seed companies too quickly.  I’m OK with this – it feels fairly benign.  But one problem it is causing is that early-stage deal prices are creeping up again higher than historic norms.  This smells like classic froth to me.  So IMHO it’s probably more of a mini “bubble” than an impending crash.

11. But it takes the same amount of money to scale a big business and this is where outsized returns are earned – If you want to build a big business you still need big bucks.  Fred Wilson wrote a great piece on this. He acknowledged the importance of the growing seed fund movement in creating a new wave of cost-effective innovation.  He then profiled his portfolio company FourSquare who started with a very small investment.  But now that it’s time for them to scale they need a lot more capital and therefore just raised $20 million from Andreessen Horowitz.  Think about it – while FourSquare has established itself as the clear market leader it is unquestionable that Facebook, Yelp, CityGrid and many more well capitalized companies will be gunning for them.  Staying “lean” is not an option.  If FourSquare wants to dominate it’s market it’s time to GO FAT.

12. Many angels and some seed funds will get burned – In good times it’s great to be an angel or seed investor.  You invest low amounts of capital and the company gets to IPO (96-99) or trade sale (05-08) without raising too much capital and certainly not on punishing terms.  But in bad economies many angels get burned. More money is needed, VCs are harder to come by and when they invest it can be on penalizing terms.  Often if you have deep pockets (or a proper fund) you can protect yourself by getting out your checkbook again.  But this only works if you have deep pockets.  And ironically the one time angels hate to get out their checkbooks is in a difficult market (in part because they’re also feeling it in their real estate investments, stock market portfolio, etc.).  So angel and seed stage investors’ returns will be dependent on good times continuing or on the ability of their portfolio companies to get financed.

13. So forming tight relationships with larger investors in the value chain is a critical skill for investors – The smart angels and seed fund investors know that one of the most important success criteria for an early stage investor is the ability to get the next round of the company financed.  Nobody understands this better than First Round Capital.  I have never seen a fund that spends so much time building relationships with every other VC (in addition to many entrepreneurs.)  Some seed angles and seed funds clearly get it.  Others spend less time on this activity.

I also think that seed funds with a very clear sense of purpose will do well.  One of my favorites is K9 Ventures.  Listening to Manu Kumar speak is like listening to a focused entrepreneur speak (and I can’t say this about all funds).  He has a set of clearly defined criteria in order to invest.  Price MUST be in a certain range.  Team must be purely technical.  Revenue must come from a primary source (as opposed to advertising or other third party sources).  Teams MUST be in the Bay Area.  And so on.  When you listen to his rules you get the sense that he really has a strong thesis for his investments and a belief in how he’ll make good returns.

14. This is especially true if we have a double dip economy – If the economy is in recovery then angels and seed funds are heros.  If we hit a double dip economy then the next phase of their investment cycle begins.  They’ll need to focus on getting portfolio companies funded.  Those that invested narrowly enough and/or have great relationships with VCs will do well.  Those that spread there bets widely or haven’t fostered VC relationships will have some triage work cut out for themselves.  “Financing risk” is one of the biggest risks for seed stage investors.  This only becomes noticeable in down markets.

15. The reality is that right sizing the industry isn’t enough.  You need to right size each segment of the industry. – While many people publicly predict that the future of investing is about seed investing I think this is wrong.  There is a certain size market for seed funding that should exist.  Excess capital will drive up prices in that segment and drive down returns.  I think this segment has expanded due to structural changes discussed earlier but it still has a natural limit.  Then there is a certain size market for A round VCs, B round VCs and growth equity investors willing to put $50 million to work.

What you’ll see is a natural segmentation of the industry (which already exists) where each segment is right-sized and we’re all inter-related and our successes mutually dependent.  The earlier the stage, the cheaper the price, the smaller the check, the higher the risk and therefore the higher expected return.  So Chris Dixon is right that super angels and seed funds should perform better than VCs – they’re taking higher risks due to an early stage.  But many others won’t navigate these risks well and will underperform.    You don’t get the increased reward without the commensurate increase in risk.

I did a short explanation of this whole phenomenon in this video.  Start at minute 50.30 and run for just a few minutes.

16. Importantly, what does this all mean for startups? As I argue in the same video above – startups are better off by the “right sizing” of the VC industry.  When there is too much money in VC then too many companies get funded and raise too much money.  Try selling your product at a fair price when you have 4 competitors who’ve each raised $10 million in VC and who expect it will be easy to raise the next $10 million.  Over funding drives poor market behavior and makes it difficult for strong players to earn proper returns.  I’m not anti competition – to the contrary.  I just don’t like too much competition armed with large balance sheets funded on speculation and hoping purely for user numbers.

So in the future less of you will likely raise VC money.  You’ll have to find alternate ways of financing your dreams and that’s OK.  But those of you who do get funded will build stronger businesses, make better returns, hire better & more committed employees.  And of course you will produce our next wave of innovation.

  • http://bothsidesofthetable.com msuster

    Although this post is anonymous – it is clearly written by somebody who is REALLY well informed. All points are accurate.

    re: deal-by-deal – I don't long for those days. I can't imagine taking the cash off the table knowing that if the returns weren't there I'd have a major clawback. I know some people seriously burned by this. And, no, they weren't very happy with their partners.

  • Jason M. Lemkin

    This is a great summary of the changing dynamics, best one I've seen. But let me throw out a point: from an entrepreneur's perspective – who cares? There's plenty of captial out there for us. More seed funds make it easier to get seed capital. And if you are successful, there is clearly still ample capital from top VC firms, who have plenty to invest. And there seems to be plenty of buy-out capital for late stage deals as well. So I don't think these issues, which are big ones for the VC industry and clearly interesting, are in fact that important at a practical level to entrepeneurs at least right now.

  • http://www.twitter.com/biggiesu Mike Su

    Great post Mark. Agree with you on the need for focus for Super Angels. IMHO one particular area of focus is the type of exit the company can expect. From an outsider perspective, it seems like it's a dangerous game for angels to look for the next Google, as they won't be able to invest in follow on rounds and their shares will be massively diluted between seed and IPO (though likely even the most diluted shares from a Google seed investment still paid out pretty well ;)

    But in general it seems like a super angel who focuses on investments that don't require the GO FAT rounds, that can exit between $20-150m can do real well, assuming there's a healthy M&A market. Just not as glamorous as being a part of the massive Google IPO. I assume this is why FRC has raised a bit more money, and is starting to invest in follow on rounds, even though at the beginning they made the case about the signaling problems of taking $$ from VCs who can follow on but don't.

  • sigmaalgebra

    Let me understand the main point clearly:

    For the context, we are focusing on 'information technology' entrepreneurship and corresponding venture investing where the projects are exploiting Moore's law, the Internet, and relevant infrastructure software, and are trying to get eyeballs to convert into revenue.

    Okay, back in the old days, of The Empire of KPCB, etc., before The Force of $200 four core, 64 bit processors with 3.0 GHz clocks, 2 TB disk drives for $100, and 15 Mbps upload bandwidth for $55 a month, a VC (venture capitalist) could invest, say, X1 dollars and get back Y dollars.

    Now with The Force, a VC can invest maybe X2 = 0.10 X1 dollars and get back Y dollars but, because X2 is so much smaller than X1, concludes that it is a bad investment.

    It is as if lemonade were selling for $1 a glass and now the price is 10 cents and, due to the new price, no one wants to buy.

    Hmm …. Makes it look like back in the days of The Empire the VC was getting paid based on X1 and not Y. No wonder they are not making money.

  • dshen

    Ha! Maybe I should give up angel investing…! At least I've attempted some diversification (I've done about 17 investments in the last 4 years) but still, I think the internet only startup space has gotten too crowded for my limited resources to diversify with.

    Also, I guess that angel investors have different goals than making money alone, although many would say publicly something different. When I started angel investing, I had goals like wanting to get back involved with young, smart entrepreneurs and get involved with many different projects versus just one. So lots of non-monetary goals and learning I've gotten over the years, albeit in a very expensive way…!

    But I also agree on the leaning on the 10% – this is something I'm trying to find a way to do now. Pile money, effort, and resources on the winners out of a diversified portfolio is something that many VCs have already learned and I've come to realize over the last 2 years. This gets us to a better chance of winning; it's also consistent with your and Fred Wilson's comments about needing to “go fat” in order to scale.

  • http://twitter.com/NickyChips Nik Souris

    .@msuster thanks and IF GRP falls in the “gone” side of your prognosis, THEN you have a bright future covering the side that “remains”. #GREATPOST

  • http://reecepacheco.com reecepacheco

    the internet is great for creating momentum… regardless of the cause.

  • http://twitter.com/MikeDuda MikeDuda

    Two things:

    One, standing ovation for the post.

    Two, how much do you charge to white label these thoughts to power my blog?!!

  • Roman Giverts

    A lot of the comments seem to be about the macro level issues, but the real point is what effect do these macro level issues have on entrepreneurs… which at least a couple short paragraphs were written about ;)

    Personally, I don't think that the number of VCs declining or the size of their funds will have a big impact of fundraising. If you're an entrepreneur, you're probably not going to be pitching 100 VCs and suddenly feel like a bunch of your contacts have disappeared. Most decent entrepreneurs have a short list of maybe 10 VC with whom they have built long term relationships. (mark has a great post about this somewhere) As long you haven't somehow met a bunch of terrible VC's, only 1-2 of your contacts will be out of the business, which isn't that big of a deal.

    I also don't think having less competition will make a big difference. Market leaders are market leaders. If the #3 and #4 players in the market disappear, it's not that big of a deal. If you're the #3 player and glad the #5 player disappeared, you have bigger problems.

    The big difference will be in hiring quality employees. I believe there is too much great engineering talent stuck at average start ups, and too many junior engineers being paid like senior engineers, usually at these average start ups. Average companies failing or not having as much money to overpay or over-hire, will improve this significantly.

    The consequence of this, still, I don't believe will be too dramatic. The main effect will be opportunities for greater acceleration (due to talent, no cash). And the main beneficiaries will be the market leaders, who get more and more great talent, which allow them to grow even faster and create even stronger market leading positions. If you're #3 in your market, the availability of more talent will not make you #1, but probably make it even harder to get there.

    So all in all, the point is that entrepreneurs should continue to focus on the basics of building a high growth thats the leader in their market. While it's fun to talk about it, the big shifts in the VC industry are unlikely to make or break your company.

  • http://twitter.com/danwbliss Dan Bliss

    Outstanding assessment Mark!

    Every market tends to overreact one way, then the other, before reaching an equillibrium. The 10-year life cycle of funds causes this to be a slow process in the VC world, because it takes a long time for the weaker VCs to run out of gas.

    I think the future is bright for startups. Entepreneurs should all learn to be scrappy and prove themselves without wasteful capital being thrown their way. Great entrepreneurs will always get it done, with or without VC capital.

  • Thereality

    Great summary. You miss the most important analysis, how much money VC's that have only lost capital for LP's have pocketed. $250 B industry, 2% a year X 5 years at least, that's about $25B in total management fees. As a 10 year entrepreneur that has had many startup rollercoaster rides, this is what I tell my LP friends. “LP's should change the traditional fee structure from 2% management fees and 20% carry to the new reality of .2% & 40% carry. 80% of the VC's out their are financial loser's and their net worth should reflect this. Most VC's couldn't run a company to save their lives. I love when my LP friends call me for real VC due dilligence. The increase in fund size has not reduced management fees. My favorite is most of the VC's out their taking a full month's vacation in August, while all of us entrepreneurs are working, as we do every year. It's time for the LP's and Entrepreneur to get together and brain storm to save this industry.

  • http://www.comradity.com K. Warman Kern

    IMO the “pick a winner and pile on” investment strategy is smart for 2 reasons. First, the days of “early adopters” putting up with “bubble gum and bailing wire” execution are over. This market is mature enough that people are ready for “something better”. Second, if most investors are using the diversify in many “lean” startups strategy, then “something better” is going to blow the competition out of the water. For what its worth :)

    Good luck whatever you decide to do . . . .

  • http://www.justinherrick.com Justin Herrick

    Great post Mark. My ego would like to assume part of this was inspired by my question on TWiVC ;), but I'll be humble and assume you had this in the wings already. Its great to hear you way in on this issue as it does seem its the hot topic among VCs and Angels right now.

    Steve Blank just wrote a blog post the other day about the golden age of IPOs and VC, and showed a slightly more pessimistic view of these times will effect startups. (http://steveblank.com/2010/07/15/welcome-to-the…)

    Regardless, I am still highly optimistic about the future of the startup industry and VC along with it. Like you said, it may mean finding another way, but its still going to be okay.

  • dshen

    In theory, “something better” for the consumer SHOULD work. However, the biggest issue facing internet only startups today is distribution or gaining customers. The competition for user attention, which is already splintered and we're getting tired of answering more invite emails from all these supposedly great internet startups, is too much. Users don't know what's better; they don't have time to try everything and switching costs are prohibitive to switch to something which is incrementally better. It's starting to look like competition via brand/design/messaging is going to change the game for a given set of similar startups.

    This is where “going fat” is also going to be critical to leapfrog a startup from its tiny set of users to world domination. SEO, SEM, viral, and all the other buzzword-worthy, very cheap methods of gaining users are becoming tougher and tougher. You're going to have to go out and spend some serious marketing time, resources and money to get a world dominating set of customers.

    But also, entrepreneurs aren't spending enough time developing something that is EXPONENTIALLY better, but only incrementally better. This also is a big problem. Many times entrepreneurs only think they are exponentially better when in fact to users they are only incrementally better. Entrepreneurs need to think more about how to do something exponentially better in crowded, highly competitive spaces. Yes it's hard. In fact, it's prohibitively hard – nobody said true entrepreneurism and building a world class new business in a marketplace with tons of competitors was easy.

  • http://profiles.yahoo.com/u/WWZLWIPW4AOJGDA5LX66XEPQMM none

    I think it depends. If you're an LP in a small fund, shaving things down to 1%/30% is questionable. If you've got a fund of $50 or $100MM, then the management fee is between $500K and $1MM. While it's possible to run a fund, doing due diligence can get expensive at times and there are other costs. So, do you really want to make your VC total scrimp and save, but hand them $100MM to not do proper diligence on? Pennywise, pound foolish.

    That being said, these megafunds should never have had 2% on $1B. I think there was a rumor years ago that a multi-billion dollar fund had partners that were raking in $30MM+ in salary a year because they raised successive funds in short time periods that were throwing off the 2% management fees. To your point, VCs should not be getting rich off of management fees.

    I know some LPs that were unhappy with how VCs were getting “skin in the game.” How the VCs were doing it was – let's say that the partners put up 1% of the fund out of their own pockets. On a $1B fund, that means they put up $10MM. Well, the management fee is 2% a year. What the VCs do is to fund their “skin in the game” with management fees. Big no no of course. Again, if the fund is pretty big, reduce the management fee to what is needed.

    To your point, there are some real bozos out there that were running funds. This is my favorite some VCs were/are bozos moment. I remember being a board observer on this company. Company is having problem getting revenues. A couple of VCs were funding the company (we weren't – you'll understand why in a moment) with bridge loans. The company comes out during a board call and says that the market is not coming together as quickly as they had hoped / expected. Two minutes later during the SAME call, this AMERICAN company is telling the board about this acquisition they want to do with an EUROPEAN company. Why? Because they think this company's technology will let them get a better product to market FASTER!!!! Now you understand why we didn't put any more money into this. Instead of cutting almost all headcount, putting the company in stasis until there was a better sense of whether there was a market or looking into taking the technology into another market, they're looking at M&A! By the way, the company had about 4 months of cash left and should have been out raising money too! What a cluster@#$%!

    Anonymously Posting

  • http://bothsidesofthetable.com msuster

    I know that “staying lean” is the conventional wisdom in tech circles these days. I just don't think it's right. Angel deals are LESS likely to succeed by definition – they're higher risk. And I promise you when we hit the next down market newer angels will get a real education. I only say that because this is the third such cycle I've witnessed and it has a predictable outcome. Time will tell who's right ;-)

  • http://bothsidesofthetable.com msuster

    Thanks, David.

  • http://bothsidesofthetable.com msuster

    I believe in sector focus – don't get me wrong. But diversification comes from sheer number of deals. You can invest in really smart, hard-working people and sometimes it just doesn't work. You can't pick 3 great teams and hope to make a return. If you have 8-10 deals from which to see success emanate and can lean on the 2 best performing you'll be in much better shape.

  • http://bothsidesofthetable.com msuster

    Funnily enough when I invest personally in angel deals I have 3 main motives: (1) help support an entrepreneur I just really like for whatever reason, (2) learn about a sector / space and (3) build relationships with other investors.

    I view the whole category as a pure investment for me in non-financial intangibles. If I make money -great. But I tell my wife to take the investment off of her expected asset register. Plan on zeros.

  • http://bothsidesofthetable.com msuster

    I agree and said as much in the last section. One implication is that less companies will get funded in the future in my opinion. But only when the seed-fund boomlet slows down. But for talented entrepreneurs money will be available and you can mostly ignore the structural changes in the VC industry.

    I was just trying to give some structure to a topic that many people seem to be discussing these days (versus anything actionable). Either that or when I got home from a bar at midnight last night I had nothing better to do since I was traveling ;-)

  • http://bothsidesofthetable.com msuster

    spot on.

  • http://bothsidesofthetable.com msuster

    Thanks, Nik ;-)

    Yes, I was in San Diego, but just quickly for the night last night and a conference this morning. Now off on vaca! Hope to catch you on the next pass through

  • dshen

    My wife keeps bugging me about when the million bucks is gonna come in. Can your wife call my wife and explain why we're *really* putting all that money out there and not buying them their next beautiful piece of jewelry? LOL

  • http://bothsidesofthetable.com msuster

    Thanks, Mike. Appreciate it. Your Twitter link is recursive, BTW – you should link to your blog! If you ever want to poach an article be my guest. Only request is a link back to my blog and use link words that add to SEO juice ;-)

    Look forward to meeting in person when we get the chance. Send you a DM.

  • http://bothsidesofthetable.com msuster

    Ha. I just did both to have my bases covered ;-) Let's grab coffee soon. Drop me an email whenever.

  • http://www.comradity.com K. Warman Kern

    Well I know how to launch a new product without eating up that “going fat” budget. Would be glad to help you.

    I'd put more into make something people would pay for.

    Wish I could find a CTO excited about what we're doing. . . .

  • philsugar

    Beth….please contact me. I am easy to find. My full name is Philip and I use gmail and my last name.

    You have some experience in an area that I am learning about and vice versa.

  • Walt

    Beautiful post! This is going to be a great time for serial entrepreneurs who have executed in the past and can execute again. If I start up a business and get funded (angels / VCs to scale) I don't want 10 competitors in my niche who also got easy money from some other VC or VC wannabe. So the Guy Kawasaki's of the world can go back to being Apple Evangelists because they were never VCs to begin with (only accidental ones due to the temporary reality distortion field generated by the original to com boom).

  • http://technbiz.blogspot.com paramendra

    A very well thought out post.

  • Rbarakakat9987

    Many VC's have become arrogant self serving fat cats…Add no value …Of course they will disappear..Some are good…

  • http://www.jasonwolfe.co.uk/ Jason Wolfe

    It's potentially the difference between US and UK markets. There isn't the volume of funding opportunities here and you have to make do with less. I'm not arguing that reduced capital will make you more successful, I just think that there are other factors that are more important. If it was just the money that made the difference, there would be some very different winners out there.

  • http://www.jasonwolfe.co.uk/ Jason Wolfe

    Yep, again perhaps the difference between the market I'm in and the one you see. Backing one thoroughbred and 15 glue-factory nags is not a recipe for success. If you have a good opportunity to spread your bets, then obviously that will help.

    When supply exceeds demand (as you seem to indicate for the US VC market right now) then you'll find it harder to get the best opportunities.

  • Thereality

    I forget to mention fund size. We all know certain angel investors, like the PayPal Mafia, and many of the micro cap VC's / today known as super angels along with the Top 10 VC brand names made alot of money over the past decade & they earned it. It's the other 80% that are financial losers, they mostly are $150m funds that are the culprits that have poisoned the tech startup industry for all of us, VC's and Entrepreneurs alike. They knew over the past decade that alot of companies had almost no chance, but in order to get their management fee, they have to keep writing checks and having too many startups compete. How many of these VC's told their LP's they had no opportunities that would make money and return LP committments. It's time for the LP's to name these losers so they are blackballed.

  • Beth

    Hi Phil,

    Sure, I just sent you a quick note at gmail.
    Beth

  • John

    No mention of the effects of the AIFMD?

  • dshen

    you are a smarter man than i – should have done both (sigh).

    august very packed – let's definitely connect in september (or after)…

  • http://www.davidblerner.com davidblerner

    http://www.huffingtonpost.com/2010/07/17/yale-d

    Could this recent discovery of a priceless 300 year-old Velazquez painting in Yale's basement reinvigorate their appetite for alternative investments?

    :)

  • http://venturecompany.com/ Georges van Hoegaerden

    Mark,

    How about the VC industry has turned subprime (see my blog), and has applied improper governance because of the improper deployment of risk. Your starting thesis that companies are cheaper to build is like building a stylus to build an iPad, a fundamentally flawed starting thesis (and focal point) and improper deployment of risk that has proven not to produce social economic value that the public trusts. Let's not use that excuse for another 10 years of underperformance with LPs.

    Unsurprisingly that rational is used by about 95% of investors and perhaps indicative of why those 95% of VC firms don't make any consistent money for LPs, according to a top money manager in VC.

    As with all innovation and financial innovation in VC specifically, it would be unwise to concoct a new venture model out of the optimization of the 95% of failures. Venture deployment needs a rebuild so it pursues prime innovation (regardless of cost), because it is simply priceless.

    The reason why venture as the financial instrument to innovation has failed (and unchanged continues to fail) is simply because of the improper deployment of risk (embedded in the VC cartel).

    So, I fundamentally disagree with the statements you made that are like the snowballs of an avalanche that should have never existed, and with a new financial system in Venture will not need to exist. I care about discussions about preventing the avalanche, not how to prevent snowballs from rolling down hill.

    Best,

    Georges

  • http://www.comradity.com K. Warman Kern

    Couldn't agree more that so far investment in innovation has “proven not to produce social economic value that the public trusts.”

    And I would much rather compete in a market where investment “pursues prime innovation (regardless of cost), because it is simply priceless.”

    K—

  • Dave44000

    VCs need to stop funding Internet companies. They are late market, competing on eyeballs, and not creating the next generation of technology. They start off in the market where everyone competes on promo spend. That wastes money and people. No big wins. So stop it.

  • Gorilla44

    What Beth says is true, but I see a very good time to be a biomedical entrepreneur. Large companies like Pfizer, J&J, Stryker, have tons of cash and very weak pipelines. If you can develop something for a big market need (there are a lot of markets like that out there) you can raise capital and eventually get your company/product acquired.

    Costs are not going down like they are in IT. Some may argue that they are going up because the FDA is getting more conservative and is making companies do longer and more complicated clinical trials. You can offset some of this by doing trials in credible countries O-US.

  • amolsarva

    What it means for startups: it's true that life is better when you don't have 5 clones to compete with. But some startups — like Peek — compete with non-startups (big players like RIMM and Apple and the non-consumption we are all seeking to eliminate). Our fast, focused, cost-efficient mobile for Internet apps like mail…well no other startup is in the area. But there are a lot of people out there using “just a phone and webmail on their PC” that need to be reached. Even Foursquare and other fat startups have a lot of fighting to do — and if no VC resources, the odds go to the big fat incumbents.

  • Ted Dintersmith

    For some reason that I'll never understand, venture capitalists and our Limited Partners generally seem to think that the laws of supply and demand don't apply to our industry. Here's what I said in 2002 about the likely prospects for dismal returns from the venture partnerships — http://www.vcjnews.com/story.asp?sectioncode=4&…. I wouldn't change a word of my caution, but LP's continued to shovel money into venture firms, and generally lost their shirts.

  • Len_Williams

    In December 2009 some predicted that there would be more innovation from entrepreneurs in 2010, as well as social media moving to prime time, more money to cloud computing, mobile devices better at specific tasks, many significant deals and more business people moving towards IPOs. Then, in July 2010 you'll read that the venture capital market in Europe has hit the bottom and its return to growth needs to be stimulated; in 2010<a href=” http://www.vcgate.com/2010/07/14/venture-capita… capital industry has a focus on biotechnology; in India food processing companies have been in the attention of private equity investors and I could go on like this, with ups and downs…Probably only the end of this year will show us relevant statistics. Anyway, I totally agree with you that those entrepreneurs who will manage to get funded will make better returns.

  • http://www.blurb.com/user/store/DanFarfan Dan Farfan

    Excellent post!
    Very informative. Assertions backed up with evidence. Great links.

  • Dr. Steve G. Belovich

    Good post. I am a 3x entrepreneur who is planning to move to the “dark side” after an M&A in about 3 years or so (sold one, did an IPO and now plan for an M&A). I am very bullish about VC because I see an under-served (and often ill-served) market, especially here in the midwest. So, rather than fight the trends that you eloquently described, I plan to use them. If the current group of VC folks are good at picking losers, great! Let 'em. I have witnessed many good firms turned down for VC money (and many more really dumb biz plans get funded – and later fail). So, I am using the local/regional VCs as my “filter”: i.e., if they fund a firm, it's almost certainly a loser. If they reject it, it's either really bad or really promising and it's not hard to see which is which. Just a thought.