Newbies Flood Venture Capital (Again)

The WSJ has a piece this morning that is being passed around madly in venture capital circles. Confirming VCs’ worst fears, it argues that there is a boomlet under way in venture capital funding, with too many first-time funds being funded by dumb money, and with the so-called “smart” institutional money — CalPERS, Stanford, etc. — cutting their contributions.

While the latter point seems true, some institutions are cutting back, and in my conversations with fund managers it is clear more first-time funds are being funded, the question is “what does it mean?”

Some argue that it means exactly what it seems: Venture capital is getting too much money and returns are going to fall. That is a legitimate view, one (unsurprisingly) held by many in the venture industry. You would hardly expect otherwise, as mo’ money has rapidly diminishing value from an incumbents’ perspective.

Others, however, feel differently. There is a legit argument to be made that the best VCs made so much money in the late 1990s that they are simply not as hungry and as risk-seeking as they once were. There is, in other words, room in the market for new folks who want to come in and play company creators and seed investors, who have the contacts and industry expertise to pick areas and build teams that can execute and create a return on capital.

Me? I lean slightly toward the second view above, but I’m well aware that there is only so much money that can be put to work in seed investing without forcing capital into the mouths of second- and third-tier firms who shouldn’t have been eating money in the first place.


  1. I agree with the latter view as well. I would add to your observations that perhaps part of the problem is ‘theme-based’ funding or sector myopia or some similar metaphor.
    As someone who spent all of 1998 and 1999 trying to sell Sand Hill Road VC’s a non-dotcom, enterprise software venture, I know first hand what it is like trying fund something that is not on the VC radar, no matter how experienced the management team or compelling the idea.
    I think it is great that there is a boom in first-time funds. Sure, the more VC’s there are the lower the overall quality of the marginal VC. But on the other hand more VC’s mean a greater number of ideas and deals will be vetted. This makes me hopeful for all of those entrepreneurs out there trying to secure seed or early-round funding. Best of luck to those that secure funding and to the newbie VC’s that fund them.

  2. Mark — Agreed, funding more things rather than less is the right objective, at least to a point. But that said, it is cautionary how venture investors, even the newest ones, all throng around the same deals with an inevitable result: Higher valuations, no more companies funded, and crappy returns.

  3. On the other hand, there is a recent study which shows that if there are more choices, the percentage of people delaying a decision increases. Thus if you have 5-6 contenders in a technology segment, the really smart money can objectively evaluate the appropriate projects and create the bandwagon effect. If you increase the number of choices, then you overload the decision making process, or worse, partition the information (2nd-3rd tier VCs don’t have same contacts) and fragment the market such that a well-capitalised follower can selectively consolidate (aka embrace/extend/extinguish) depressing the risk-return curve. If you follow the Austrian School of Economics capital pool and stages of development, then ultiamtely the consumers have to pruchase the outcome (product + exit) and an incoherent offering just won’t fly, depriving entrepoenurs of their sweat equity.