Pouring, Drinking, and the Allocation to Venture Capital

Some savvy comments on how it is not your parents’ VC business any more, from a recent HBS venture capital conference. Persistent asset allocations to the venture category has created a stable fund supply, which means that some funds (and ideas) get funded, even when they shouldn’t:

Sahlman noted that in the history of venture capital, the money that limited partners made available for investment has ebbed and flowed. That phenomenon seems to be shifting, he said.
“One theory is today the money doesn’t go away. The limited partner community has defined venture as an asset class; they’re going to stay in the market no matter what. If they can’t get an allocation at a top-tier fund, they’re going to go further down the food chain…so I think there’s no equilibrating mechanism right now,” Sahlman said. “Is that a problem?”
“There’s a lot of capital out there now trying to be placed,” noted Mullen. “The statistics are almost overwhelming.”
He said estimates indicate there are about 700 venture capital or private equity firms currently active, and it is expected they will raise more than $230 billion this year.
“I heard somebody say recently that the position on whether the glass is half-full or half-empty depends on whether you’re pouring or drinking,” Friend said.


  1. Well you have a lot of LPs chasing 20%+ returns however they can find it. The way I look at it is that there is more money available for all forms of investment. High P/E ratios, an explosion in hedge fund capitalization, lots of money available for venture funds are all signs of the same pressure.
    As long as the risk adjusted return on VC is higher than most other investment classes then money will continue to flow in.

  2. David Bennett says:

    My own feeling is that not much of the surplus capital, organizational capacity, connections or entrepenurial “big vision” is being focused on all the tweaks and potentials of small business. There are lots of people out there with competence and experience who could take off. But unless they belong to an ethnic community with cultural “banking systems” (eg. Chinese) and have familial credit within it, they have a hard time getting capital or the other supports.
    It would seem there would be opportunity in this kind of thing, especially because it allows the investors to use their knowledge of the local community. To the extent it occurs I think it tends to be focused on financing typically poorly thought out schemes of the investors class, not financing and directing those with experience actually doing the work.