Reshaping Venture Capital
Bill Warner Wednesday, June 10, 2009
There’s a new analysis from the Kauffman Foundation that captures the situation that venture capital firms find themselves in today. It’s very informative and worth your time to read.
The usual observation is that venture capital is in trouble because of excessive and disadvantageous regulations, especially Sarbanes-Oxley, and the fact that the IPO market has dried up leaving them with no viable exits.
The core problem for venture capital firms
When you look at the total amount of money committed to venture capital hovering around $250 billion since 2000, versus the performance of venture capital hovering around zero since 2004, Kauffman concludes that this level of venture capital money is not sustainable because the market they are focused on is shrinking. It is this over commitment of venture capital money by limited partners that has led to its collapse.
Likewise, the pace of venture capital investments is currently hovering around $30 billion per year, which is 2 to 3 fold the pace of opportunities. This is arguable in that there are lots of new opportunities in biotech and cleantech that could justify this difference. Nevertheless, venture capital performance doesn’t support this pace.
What will happen to venture capital
According to Kauffman, the likely outcome is that limited partners will decrease the amount they invest in this asset class. This certainly is a trend we have been seeing for the last several months, mainly driven by the downturn of the economy which has caused them to reconsider their venture investments. This action will cause an appropriate adjustment to the overall amount of venture capital in play and the pace of investment, the result of which will be a realignment of valuations and ultimately improved performance.
Kauffman believes the adjustment could be to $12 billion per year driving a reduction in committed capital to around $100 billion.
How are venture capital firms responding
Meanwhile, venture capital firms are responding to this challenge by finding new ways of doing business in an entirely different business environment of lower investments required, lower valuations and lower returns. We have seen new forms of syndication, new alliances, and new business models all of which are responding to the downturn of the venture capital market.
Filed Under: Angel Investment, Financing a Company, Starting a Business
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
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