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The Deal: Fred Wilson predicts "less capital in the asset class, smaller fund sizes, smaller partnerships, smaller deals and smaller exits." Do you agree? David Hornik: I do think the total capital that will be available in the venture industry will likely contract, and that's appropriate. I don't know that I agree with the rest of the assessment, though. There will always be big, interesting tech companies. The future of this country remains hugely driven by technology, and technology innovation hasn't slowed in any meaningful ways. There will still be big, interesting exits. The problem is that the VC industry had scaled beyond what was a reasonable carrying capacity, even for big exits. In the late '90s, it seemed like there was a huge opportunity to invest money in the venture industry and get outsized returns across a huge set of businesses, and for a very brief period of time that was the case. The returns were stunning. And there was an opportunity to take immature businesses to public markets with big economic returns in a surprisingly short period of time. Great venture funds will continue to deliver great returns. But the aggregate returns were not as great as people anticipated. What is an appropriate return rate for venture investments? That's a question for the LPs to decide. The question is sort of irrelevant because as a venture investor, you can't choose your rate of return. You can't say, "I will invest in this The real question is, Can successful venture investors deliver outsized returns? If successful venture investors can only perform at the same level as the market, then the risk-to-reward ratio doesn't make sense. If we want to have people continue to invest, venture capital has to have outsized returns, but predicting the scale of that isn't particularly valuable. Can some venture firms deliver outsized returns? There's no question they can. They always have and they always will. How do LPs know VC firms will deliver outsized returns, given the long-term investment horizon? That's the challenge. In the same way that venture capitalists find those companies that will outperform other companies, the challenge for LPs is to figure out which venture capital partnerships will find those outsized returns. "Past performance is not an indicator of future performance." We've all seen those warning statements, but in the venture industry that may not be the case. If you look at past performance of firms and individuals, it's not a bad indicator of finding the next interesting company. LPs will continue to look at past performance as a proxy for how a firm is likely to perform in the future. The shrinking of the VC asset class that Wilson talks about may work well for the capital-efficient digital media startups Union Square invests in, but how does it play out in areas that need more capital? It depends on how much contraction there is. If the available capital becomes one-tenth of what was previously available, that's a huge difference that could have a huge impact on the ability to grow even the most interesting companies. But my strong suspicion is that the companies with the most promise will continue to be able to find the capital they need to grow their business. I do not believe the venture market will contract to the point of constraining those companies that are likely to be successful, but there is the chance that outlier companies on the fringes don't get funded as a result of contraction in market. When I look at fundraising since October in what is probably the worst VC environment ever, I see that the most interesting companies have no problem raising money. Are there whole capital-intensive sectors that many VCs will avoid, and might innovation in those fields suffer as a result? Ultimately, capital-intensive businesses will find it more difficult to raise money. But I don't think that's irrational. I think that's the rational answer. Even in a market flush with capital, we venture investors should have been careful about the challenges of capital-intensive company building. People will be more cognizant of what it takes to get to meaningful technologies, and businesses will be assessed on risk-to-reward ratios. August Capital is quite active in the microprocessor space, and this is a huge challenge for the chip business. But the ones we see and have invested in are so interesting if they work, that are worth the risk of capital-intensive bets. I think you have to ask, "What is the proper role of venture capital versus what is the role of university funding and government funding in research?" I don't think the venture market will contract to the point where technologies that are otherwise widlly interesting will somehow not get developed, but pure research is not the proper role for venture capital. Venture capital has always been about commercializing interesting technologies that have been developed in other contexts, and that continues to be the case. Unfortunately, the current environment puts pressure on all those other sources of funding for research.
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David Hornik -- a partner at August Capital Management LLC, which boasts raising the year's 
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