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?