You Must Be Kidding Me…

To great fanfare analysts welcomed the VC fundraising data for 2011. You must be kidding me. According to VentureWire (published by Dow Jones), apparently there were 135 funds which raised $16.2 billion in 2011, as compared to 154 in 2010; Thomson Reuters/NVCA counted $18.2 billion raised by 169 funds in 2011, of which 49 were first-time funds. The NVCA identified 38 funds which raised $5.6 billion in 4Q11 alone. Of those 38 funds, 9 were “first time” funds and 4 were over $1 billion in size. Not bad you say.

So here is what the analysts don’t say. Let’s stay with the VentureWire data: of the $16.2 billion raised in 2011, $10.5 billion of that was raised by only 15 firms. That means 120 firms raised the remaining $5.7 billion for an average fund size of less than $50 million. That does not make sense to me. It certainly did not feel that robust to me and I am in the market every day.

But what does make sense to me is that the VC industry is both rapidly contracting and concentrating around a small fraction of the firms in the industry. The NVCA counts over 400 active members and presumes to represent more than 90% of the capital under management today. My guess is well below a 100 firms nationally can predictably raise a new fund in this environment.

Other NVCA data to ponder: in 2007, 237 funds raised $31.1 billion; in 2008 those numbers were 212 raised $25.9 billion; 2009 – 161 raised $16.4 billion; 2010 – 169 raised $13.8 billion – a five year low point which coincided with 10-year VC industry return numbers being negative. This year showed an upturn in overall dollars raised but it was driven by fewer, larger firms. Now that the 10-year industry returns data is once again positive, hopefully dollars will flow back into the VC industry.

What do you make of this? Is it good for entrepreneurs?


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5 responses to “You Must Be Kidding Me…

  1. It appears to be yet another consolidation of wealth into fewer hands. We’ve seen it across a multitude of industries since deregulation took off, undoing the things that might have prevented the pooling we see.

  2. Michael: Thanks for the interesting post.

    The consolidation in your sector is, as you point out, correlated with and probably caused by the poor ROI that institutional investors in VC funds have experienced. Now that performance has turned positive, it will be interesting to see whether this phenomenon reverses itself.

    But to answer your question, I don’t think the consolidation in your sector is marked enough (yet) to be a concern for most entrepreneurs. From our perspective, there remain a dizzying array of VC firms out there, and it remains an alarmingly complicated and time consuming process for us to sort through the myriad funding opportunities.

    To pursue your thesis further, I’d suggest a breakdown of the remaining funds (e.g. the ‘big 10’ vs. ‘the others’) by stage of investment (seed, early, revenue-generating, etc) and by the sectors they’re focusing on (I believe VentureWire provides these data). Such an analysis might reveal that in certain areas, the consolidation has indeed become significant enough to affect certain sub-categories of entrepreneurs.

    Glenn Laffel, MD, PhD
    CEO, Wellcoin

    • Great to hear from you, Glenn. All great points. With the snow today, you have now given me something to do! I have been staring at the sector data and see something notable trends. More to come. Hope you are well.

  3. Michael-

    Great post. There are two narratives here:

    1. The haves vs the have nots in VC – here’s something good i read on that topic last year

    2. Even more stunning is the return of the mega-fund in the past 18 mos. Historical data quite emphatically shows that large funds over $250M dont show great performance – in fact, they suck – for lack of a better word.

    See my recent post on this:

    If I was sitting at the NVCA, these signs would all be quite troubling to me – despite the positive headline #s. This may be reality but it is not a healthy ecosystem for VC.

    The NVCA should be doing more to promote VC to new types of LPs other pools of capital who might consider investing in the asset class vs. focusing on the carried interest taxation debate – which has an inevitable ending.

  4. Pingback: The JOBS Act – trickle down theory in action « Jill Thorpe's Blog

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