So one final thought…something I have been wrestling with for some time now is how many venture firms can reliably, predictably and on their terms raise a new fund in this environment? Tough question to answer but the data may shed some light.
According to the NVCA Yearbook 2012 there were 842 VC firms in the US at the end of 2011 which have raised capital in the past eight years; of that cohort, 526 firms were deemed “active” – which means they made investments totaling $5 million that year (frankly, a pretty low bar). Interestingly, at the end of 2011, there was approximately $197 billion under management in the US venture industry. Also of note there were 1,012 firms in 2006 so the industry lost 170 firms (or 17%) over the past five years; that same year there was $288 billion under management, which means from a capital managed perspective the industry shrunk by 32% over that same five-year period.
So this is what is so potentially daunting. This past quarter there were 10 firms which raised funds larger than $100 million, which I would deem as a threshold to be material to the overall industry. If this past quarter is representative of the new reality then, and firms raise new funds every four to five years, might one conclude that there is only room for only 160 – 200 firms? Are we looking at an industry that may contract by another 50% – 75% in terms of number of firms?
More numbers. The median fund size of those top 10 funds raised last quarter was approximately $350 million; across those same 160 – 200 firms that would be $56 – $70 billion raised over the next four to five years. Does that start to suggest where we are heading and how large the VC industry will be? The last time the VC industry was less than $100 billion was in 1998 ($91 billion managed).
Undoubtedly this is too dark a picture. We are investing in a time of unprecedented innovation which will drive superior investment performance. As returns and liquidity come back, LP’s will be drawn back to the VC asset class – but the analysis is thought provoking nonetheless.
What do you think? What percentage of firms today can raise a fund on their terms? 5%? 10% 25%?