Paul Kedrosky, senior fellow, Ewing Marion Kauffman Foundation, is the latest to weigh in on the challenges facing venture capitalists. His
report, Right-Sizing the U.S. Venture Capital Industry, arrives Wednesday, the same day that the National Venture Capital Association releases its The 2009 Global Venture Capital Survey.
Underscoring the point that venture capital is an asset class that is shrinking, 51% of the 700-plus VCs who responded to the survey said they expect to lower the number of companies in which they invest, whereas only 13% plan to increase their activity.
Kedrosky, after a careful examination of the VC industry's performance, reaches the same conclusion Union Square Ventures co-founder Fred Wilson did back in April in a widely read post on The Venture Capital Math Problem.
"I think 'back to the future' is the answer to most of the VC asset class problems," blogged Wilson. "Less capital in the asset class, smaller fund sizes, smaller partnerships, smaller deals and smaller exits."
Now Kedrosky chimes in:
"It seems inevitable that venture capital must shrink considerably. While there is no question that venture capital can facilitate some forms of high-growth entrepreneurial firms, its poor returns make the asset class uncompetitive and at risk of very large declines in capital commitments as investors flee this underperforming asset. While any estimate is subject to much uncertainty, it seems reasonable--based on returns, GDP, and exits--to expect the pace of investing to shrink by half in the coming years. We should also expect a continuing sharp decline in the amount of money invested in information technology, a maturing sector with declining capital requirements in its remaining innovative segments. Capital will continue to grow in other areas, including clean technology, but the sector must shrink its way back to health if venture capital is to provide competitive returns and secure its own future as a credible asset class and economic force."
For more on the evolution of the VC industry, see Honey, I shrunk the VCs in the current issue of The Deal magazine. - Mary Kathleen Flynn
