Let's put it this way: Forbes needed an eye-catching headline, and they found one. Yes, there's going to be a big shakeout in Venture Capital; that much is certain. But collapse? I doubt it. Either way, there will be serious consequences for entrepreneurs, venture-backed firms, and America's entire economy.
First the facts
- Exits are hard to come by. IPOs and mergers and acquisitions, the top two exit scenarios for venture-backed companies, are way down. Sarbanes-Oxley and changes in accounting rules have had a chilling effect on both.
- Investors aka limited partners, are taking it in the shorts, big-time. Most funds are losing money and many institutional investors are paring back their investments in venture capital.
- There is a huge glut of venture capital and venture firms. According to Forbes, the industry is now managing $257 billion, up from $64 billion in 1997. There are 741 venture firms managing thousands of funds, at last count.
There are VCs and there are VCs.
There are great venture firms that have winning formulas and add significant value to their portfolio companies. There are tier-one firms like Kleiner Perkins and Sequoia, and other great firms I've had the pleasure of working with including Sevin Rosen Funds, Benchmark Capital, August Capital, InterWest Partners, and Mohr Davidow Ventures. These and many others will of course survive the current harsh environment.
Others may not fare so well, and I'm not sure that's a bad thing. Worldview Technology Partners in Palo Alto is the first major firm I'm aware of to essentially close its doors. It may or may not be a coincidence that my prior experience with the firm was, well, let's just say I'm not at all surprised.
The market can certainly afford to shrink significantly, in terms of both capital and firms, without doing much harm to the economy. Capital will remain tight, and entrepreneurs will be forced to manage more conservatively, but deserving companies will continue to get funded. That said; there is cause for concern.
Make no mistake; the venture capital industry is critical to America's leadership as a world economic power.
I used to spend a great deal of time working in Asia, primarily Japan, Korea, Taiwan, and China. My customers were big, multinational firms like Lenovo (formerly Legend), LG, NEC, Panasonic (formerly Matsushita), Samsung, Sony and Toshiba.
Executives from those firms all agreed on one thing: that the combination of America's entrepreneurial culture and venture capital community was the one distinguishing factor that their nations could not duplicate. Why that is was always the subject of lively debate over overpriced scotch.
Okay, so I'm not very concerned about the coming shakeout in venture capital. It's long overdue, will align the industry with economic reality, and its Darwinian aspect - survival of the fittest - is a good thing.
On the other hand, we should keep a close watch on the root causes of the shakeout, most notably SOX, accounting regulations, the IPO market, mergers and acquisitions, and the state of our investment banks. America can't afford to lose the entrepreneurial culture that created the likes of Apple, Cisco, Google, Intel and Microsoft. That would be disastrous.