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May 16, 2005
Half of All VC Firms to Disappear?
At the TiEcon 2005 conference last Friday, a panel of VCs offered some fresh perspectives on what had become, for me at least, a tedious debate: whether there's too much capital in the VC business. Promod Haque, a general partner at Norwest Venture Partners, had the most forceful opinions. "Over the next five to ten years, I believe there are going to be half as many venture capital firms in this business, and there are going to be half as many companies being created," he said.
Haque contends that there is a supply-demand imbalance between the amount of money earmarked for funding startups and the appetite for startups' products. There are simply too many companies created and not enough paying customers, he says. This is not necessarily a new position, but it's been a while since I've heard a VC state it with such authority, especially since recent reports suggest the overhang of capital is shrinking.
Haque also had a grim outlook for aggregate VC returns. "Over the next ten years, you're going to get 30-year bond yields on venture capital investments," he said. That's partly because of all the failed companies that will result from the supply-demand imbalance. It's also because a glut of capital leads to valuations getting bid up even for viable companies. "When you have so much capital on the sidelines, someone's going to step in and pay a higher price," Haque says. "We're in the middle of a mini-bubble again."
John Malloy, a managing partner at BlueRun Ventures (formerly Nokia Ventures), said the problem is a concentration of capital, not an oversupply. "If you believe that technology is diffusing differently and innovation is happening not just in one place, then why is so much capital concentrated here [in Silicon Valley]?" he asked. Of course, concerns about too much venture money in the U.S. have led VCs to look for developing foreign markets like China and India, which in turn have become hot-spots that may soon be overrun with capital. Malloy acknowledged that problem and called it "worrisome." Though spreading money around may cool down markets where capital is concentrated, it may not help returns if there aren't enough places in the world to make feasible VC investments.
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Tracked on May 24, 2005 07:50 PM
Part of the problem is post-boom companies funded in the 2000-2003 timeframe that may have been predicated on rising IT spending, but so many companies are still focusing on *cutting* spending.
The last forecast I saw was for tech spending to rise by 7.9% over the next 12 months... and you can be sure that IBM, Oracle, Microsoft, Accenture, HP, Dell, et al want significantly more than their fair share of that 7.9% gain, so we're looking at even more pressure on the 2000-2003 venture-funded IT startups. Kind of tough for a *new* startup to break into more than a tiny niche. Sure, it will happen, but not as a dramatic wave of IT startups.
-- Jack Krupansky
Posted by: Jack Krupansky at May 17, 2005 12:34 PM
John Malloy makes an interesting point. I think technology creation is today a globalized phenomenon. I even disagree with those who have developed a blind spot that early adopters are all in the U.S. alone. Something like electric cars are quite succesful in small cities in India - and these are developed and manufactured by a new Indian company (not established players).
So, spread out if you have capital and are looking to invest. The returns are much higher in India as the cost of building a product venture (including initial test marketing) is rather low. And there are early adopters even in India/Asia.
Posted by: Jaimin Mehta at May 27, 2005 03:34 AM