The following are links to two great posts on the business of venture capital:
The first, from Bill Burnham, insightfully explores the issue of whether or not the industry is currently heavily over-funded. He concludes that
“…[while] venture capital may not be wildly over-funded at an aggregate level, anyone on the ground will tell you that there are clearly localized pockets that are highly over-funded.”
His unique approach to the aggregate level view states that “It’s all relative” and compares the amount of venture capital under management to the market capitalization of the NASDAQ. He states,
“One way to create such a context is to compare venture capital to the public markets on the assumption that venture capital is closely tied to the public markets because public markets are the primary source of VC liquidity.”
The only question I would raise is: because a start-up’s liquidity event most likely occurs in a three to five year time-horizon, would another meaningful figure be a comparison between the current venture capital under management and a metric based on the anticipated future value of the NASDAQ? In the fall of 2002, I think that there was more talk about over-funding then than there is now, partially because the anticipated future value of the index was probably lower then, not just because the current index was lower.
The second post from Paul Kedrosky begins to make a case that while raising a first-time fund is becoming increasingly rare, perhaps a first-time fund isn’t such a bad thing. He concludes,
“If traditional strategies are looking tired, then what better way to find people with access to different deal flow, different stages, different geographies — or different anything — than by going against the flow, say to people promoting first-time funds.”
I also personally wonder how many of the so-called current first-time funds raised in the past year are really experienced investors regrouped under a new fund.