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.