Currently the crowd is betting against venture capital and the crowd has good reason to do so. The venture industry has been overrun by cheap imitations and everyone is to blame. Nonetheless we find ourselves in a situation where many venture firms are dying and their limited partners have henceforth sworn off venture fund investment allocation. So what is the positive side of this negative?
In a phrase..."substantially less competition." And what happens when there is substantially less competition? Specifically:
- Lower pre-money valuations;
- Better concentration of management teams (there are fewer places for them to work); and,
- Fewer "me too" competitors which reduces market confusion and shortens product sales cycles.
Less money to make higher returns sooner.
Companies that struggle to get one term sheet today would have received three term sheets back in 2005 (these are my own observations). The number of software deals completed each quarter in 2005 averaged 220. The number of software deals completed in the 3rd quarter of 2009 was 128 (per NVCA). This reflects a decline of 41.8%.
To put the decline rate into perspective...complete the following exercise with me: Look around your place of operation...see the people that cause the operation to move...now imagine that 4 out of each 10 of them simply vanish and are not available to the business. This is the magnitude of things underway in the venture industry. My sense is that we are now in the second half of an industry purge. My other sense is the magnitude of the pain incurred today can be proportional to the prosperity of tomorrow. To paraphrase a famous investor..."When other people get scared..you should get greedy."
To put the decline rate into perspective...complete the following exercise with me: Look around your place of operation...see the people that cause the operation to move...now imagine that 4 out of each 10 of them simply vanish and are not available to the business. This is the magnitude of things underway in the venture industry. My sense is that we are now in the second half of an industry purge. My other sense is the magnitude of the pain incurred today can be proportional to the prosperity of tomorrow. To paraphrase a famous investor..."When other people get scared..you should get greedy."
