VCs have $252 billion in capital under management today.
Now consider the pickle in which the industry finds itself. Venture funds run ten years. To earn 18% annual returns for their investors–the low end of historical venture capital returns–the funds would have to create $1.3 trillion in market value by selling or taking public their portfolio companies over the remainder of the decade.
Think about it this way. eBay is one of the few successes to emerge from the dot-com boom. At its peak, eBay had a $16 billion market value, and its venture backer, Benchmark Capital, made more than $4 billion on its investment. So how many eBays would have to be taken public by the end of a decade for venture investors to achieve 18% returns? More than 325. That’s roughly one eBay every 10 days between now and 2010.
A side-effect: “The biggest losers could be the entrepreneurs who depend on venture capital to fund their startups. If new, innovative companies have a tough time raising funds, economic growth will be hard to come by.”
One of the reasons that there aren’t enough companies getting funding is that the entrepreneurs are stuck running companies they founded during 1997-2000, and from which they don’t have an easy exit. In other words, there is a very limited supply of “serial entrepreneurs”, whom VCs are most likely to fund.
Earlier, there would be liquidity events for startups every 3-5 years (either IPO or acquisition). But in the past two-and-a-half years, there’s been very little of either. The result: most entrepreneurs are stuck running the companies they founded, waiting for the market to improve or their cash to run out. Only then can they move on the next new thing.
So, I don’t see the venture capital investment scenario improving dramatically until the current set of companies gets purged or the US economy improves dramatically and tech starts booming again. Neither is likely in the near-term.