Robert Wuebker
by Robert Wuebker
Wed Aug 26th 2009 at 11:25am UTC

Is There a Natural Cap to Venture Investment?

Over the past three years venture capitalists and analysts have engaged in a great deal of hand-wringing about the state of venture investment: the lack of a robust exit market, declining valuations, fund-raising challenges, and more fundamental criticism that the venture model is “broken.” The solutions range from overhaul of the structural or contractual mechanisms employed by the investors; a return to the (perhaps mythical) halcyon days where venture capital investors were consumed with building businesses rather than generating returns; or even a federal bailout.

Two recent posts – one by Bill Gurley (What Is Really Happening to the Venture Capital Industry) and another by Fred Wilson (The Biggest Loser Can Be The Biggest Winner) – merit closer inspection. In his post, Gurley provides an argument and some evidence for why venture capital will shrink. In his view, institutional investors (the largest contributors to venture) will soon adjust the amount of funds they allocate to venture, and the amount of available capital for early stage investments will shrink. How much? Gurley says by up to half. Wilson builds on this post, suggesting that “the diet has begun” and that shrinking venture allocations is a good thing because the current model “is not repeatable or sustainable at scale.” Wilson reckons that “we need to get the venture capital industry investing less than $20bn a year on a sustainable basis.”

Structurally, it’s not clear at all to me that there is some inherent feature of the venture model that prevents scaling far beyond current amounts of fund-raising or allocations. In my view, as entrepreneurship globalizes, the current industry must evolve to stay relevant as a capital market actor participating in the financing of high-growth firms; and the early data detailing the fund-raising and allocation activity in venture globally tends to support this perspective. Perhaps these two recent posts are talking specifically of the U.S. share of early-stage capital shrinking to some new, sustainable level that represents the natural, normal return to equilibrium in global innovation capability. In this view, venture allocations (and perhaps fund-raising) will shrink in the U.S., and expand elsewhere. Perhaps the U.S. venture industry has something to learn from the U.S. manufacturing sector after all.

What say you?

3 Responses to “Is There a Natural Cap to Venture Investment?”

  1. Creative Class: Is There A Natural Cap To Venture Investment | Lies My Gantt Chart Told Me Says:

    [...] post on the state of Venture Investment. The comment about the broken venture model is right on. [...]

  2. hayden fisher Says:

    You touch on a major economic development issue and obstacle– lack of venture capital. A recent article I read last week cited findings that most entrepreneurs are middle-age+ and connected entrepreneurship with experience and age as opposed to from youthful energetic and ambition. The reality is that it generally takes one many years of accumulating the money and assets necessary to leverage in a new business. Far too many young would-be entrepreneurs never launch their visions because they cannot fund them. They do not have home equity lines, 401(k)’s to cash-in, etc. The last year has taught us about the pitfalls of asset-based lending. The federal student loan programs enable anyone who proves their qualification for admission to pursue their educational opportunities. But there is no equivalent publicly funded path for entrepreneurs. The economic development programs are not tilted towards start-up businesses, they tend to focus on big projects and companies; not bottom-up growth through entrepreneurship. The recent TARP payouts show that the government can make money lending it and foster economic development in the process. We cannot rely solely on private models. Government can fuel entrepreneurship and raise revenues at the same time, thereby enabling it to lower productivity taxes while delivering a broader shared prosperity for all.

  3. why is there Says:

    [...] Creative Class » Blog Archive » Is There a Natural Cap to Venture … [...]