Please Define the VC Industry

Over the past months, there has been a lot of debate & discussion around how many VC funds there should be and how much money should be allocated to the VC asset class by investors. Many venture capitalists and pundits have argued that the VC model may be "broken" and needs to shrink for things to be better.
"While the venture industry is known for backing icons such as Google, Genentech, Home Depot, Microsoft and Starbucks, less than one-in-five of the fastest-growing and most successful companies in the United States had venture investors, according to the study."
What that tells me is that the VC industry is broken because investors weren't able to get into the 4 of 5 other fastest-growing companies.  Maybe if VCs spent less time blogging (yes, I get the irony here), tweeting, and checking-in they might be able to spend more time proactively sourcing and adding value?

I could go on and on with tongue in cheek commentary about the debate, but I won't.  Instead, we should reflect on some data.  According to the NVCA, in 1989 there were 389 firms in existence and in 2009 the count was 794.  Roughly speaking, that's about twice as many firms.  Considering the impact that both the Internet and globalization has had over the past 30 years, that doesn't seem so unreasonable.  Additionally, how possible is it that the actual count of firms 30 years ago was off?  After all, this is a cottage industry and it's very private.

The average capital under management per firm in 1989 was $73 million and today it's 226 million.  This points to (a) the institutionalization of the industry (ie firms raising multiple funds over time) and (b) some level of inflation over a thirty year period.

The average fund size raised thirty years ago was $47 million, today $121 million.  Although inflation probably only accounts for the average fund size growth to about $80 million, that incremental $41 million, I would argue, likely comes from "mega" funds skewing the average.

With that as a preface, here are some questions that I keep asking myself about the data and about the many conclusions that pundits have made about the industry needing to shrink:
  • What about firms like NEA that manage two funds of $2.5 billion each?  And, Oak Investments with a 2006 fund at $2.5 billion as well?  Are those entire amounts considered "venture capital" and is it fair to put those dollars in the same bucket as a $150 million True Ventures fund?
  • Although not as large as the above, what about firms like Austin Ventures, Accel Partners, Battery Ventures, and Sequoia?  They invest in both startups and (sometimes) buyouts.  And, in fact, some of these firms have invested in publicly traded PIPE securities.
  • What about the Founders Collective at $40 million?  Is that angel money or is that venture capital?  How about IA Venture Partners, David Rose, or Ron Conway's vehicles?
  • Do Insight Venture Partners, TCV, Summit, and TA Associates count as venture funds since they do provide growth equity to technology companies but also often provide liquidity?
  • What about the later-stage venture capital and growth equity shops that play the venture game: FTV Capital, Tudor Ventures, InvestorAB, or Institutional Venture Partners?
  • Is Elevation Partners considered a venture investor since they provided some capital to Yelp?  What about Digtal Sky Technologies (DST), the Russian Internet-focused investment firm that's put $200 million in Facebook?  Do they, and other non-domestic shops, get included in the numbers?
  • Mostly offline today, how do hedge funds get counted in the mix?  Firms like DE Shaw, Moore, Galleon, Pequot, and Tiger Global have all made significant investments in venture capital over the past decade?
  • And, what about secondary direct shops like Saints Capital, Industry Ventures, W Capital, and Millenium Tech Venture Partners?  They provide liquidity to selling shareholders & founders, but also often provide growth capital.  What percentage of their funds are considered venture capital?
  • What about firms like Kennet Partners or InvestorAB that have offices in Europe and in Califonria?  And, what about the dozens of venture capital funds that have offices in China or in India?  Does geographic expansion have any say in the relative increase to the venture capital asset class?
  • DCM, Canaan, Globespan, and Greylock are in China, India, Japan, and Israel, respectively, in addition to having headquarters in the United States.  Is it fair to compare their current fund sizes to a fund size from twenty years ago when they only invested in the United States?
I don't think that anyone is capable of "bucketing" these investment dollars accurately.  The reality is that the PEVC asset class is a blur.

I keep seeing plenty of really interesting private investment opportunities and am strong believer in the overall asset class.   There are certainly problems around compensation and alignment of interests, but that's an entirely different post for a different day.

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