Here’s a must-read article from Fred Wilson on Venture Capital’s math problem (and here’s a follow-up). He talks of the inability of VC to scale (I think the same can be argued for any segment of Private Equity) and the fact that too much money has poured into the asset class. Given the fact that between $20-$30 billion has been coming into the industry a year would require $150 billion a year in exits, while in reality only $100 billion is being achieved.
This isn’t news to many, as LPs have been growing increasingly displeased with the results they’ve been getting from Venture Capital as an asset class overall. Taken one step further, these excess funds to VC has also meant that many funds exist that shouldn’t and that there are many people in the business that shouldn’t be (again, I believe this to be true of all segments of Private Equity). Now, this isn’t a debate on the virtues and benefits of having more money for VCs to invest in growing companies, this is about the viability of the industry as an asset class.
Further, for those you who may say that VCs having extra billions to spend (Hello, Tom Friedman!) will only help entrepreneurs get easier access to funding, I would say that not every start-up/growing company is appropriate for being venture-backed and enabling second or third-tier VCs to keep on going won’t be all that beneficial in the long-run. I know of good start-ups that got ruined by VCs that should never have been in the business, but ended up getting funded because, well, at the time just about anyone claiming to be a VC could get funding.
I’m passionate about Venture Capital and the benefits it’s provides, not only to the economy but to investors as well, and hopefully it wakes up to the idea that bigger in this case may not necessarily be better.