Half of All VC Firms to Disappear?Justin Hibbard
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.