Another quarter, another awful headline for the VC industry. The NVCA released data on Q309 fundraising last month. The findings: abysmally, historically, mind-blowingly bad. Only 17 firms closed a fund, and only $1.6B flowed into American VCs’ coffers.
The trend is not our friend.
Many view the massive dip in VC funding to be positive news. Believe it or not, many of the strongest proponents for a VC shakeout are within the venture industry itself. It can be argued that less funds mean less competition for each deal which drives down valuations. It also means less competition among funded startups, as fewer will end up getting the working capital they need to survive and ensuring VCs are more likely to see bigger and quicker returns on their bets. Less money flowing in overall forces both VCs and startups to be more capital efficient and improve their RoIs.
One other annecdotatal point (read: I’m too lazy to dig up data) is that limited partners — the people that invest in VCs and other types of private investors – appear to be going big and going quality. The industry may thus be reinventing itself in a much more sustainable way: as capital slowly but surely returns to the market, it’ll do so in a less distributed way that won’t scale up competition and drive returns back down to nothing. For example: in 2007 when public markets were humming, 25% of funds closed were new. Through three quarters of 2009, that figure is down to 17%. Data after all…guess I’m not as lazy as I thought (though I was really just lucky that this chart was on the same webpage as the one above…). Coupling all this the lower valuations out in the marketplace, you can almost see why VCs are somehow still confident.
Only 15 new funds were closed through three quarters of 2009
The takeaway is that the most likely reason for weak VC performance in the years since the internet bubble burst is over-funding, driven by asset managers in search of more alternate investment classes typically delivering above-average returns and the VCs that were willing to invest their money. The lesson: not even Silicon Valley and all other tech meccas can efficiently absorb those levels of funding. Ultimately this level of right-sizing should be good news for the survivors. That said, it’s got to be tough for the asset managers who have no idea where to put their money these days. And an awful situation for out-of-work VCs, who have little prospects for finding something interesting in such a brutal job market, and whose top skills are in a field looking more endangered than ever.
Clearly others have done better and more thorough reporting on this topic (most famously here). My point in presenting it is mainly a reminder of the impact this economy is having on today’s venture and startup community, and to post a challenging question: While we can safely assume the survivors will benefit at the expense of others who go away — both among VC funds as well as startups – I want to know if there will there be a net positive or negative impact on innovation and society. Less funding and less competition among startups suggests poorer technological output, but it also means less time required on sales and marketing to convince customers/ investors that their product is best, allowing them to move more quickly dominate a new market and on to tackle the Medtronics and Googles of the world. I’m somewhat bullish. Less patience and money usually make its tougher for bad ideas to survive, even though the opposite might not necessarily be true…What do you think?
