According to NVCA data released yesterday, the proportion of new first-time venture funds among all such funds successfully raising money in the first quarter of 2005 is at a 5-year low. Where 40% of all venture funds doing successful raises were first-time-ers in 2000, only about 12% were new in Q1 2005.
So, what are we to make of this factoid? One view is that the venture market is engaged in a kind of flight to quality, with venture investors reacting to lower returns by becoming laser-focused on only investing in funds that have demonstrable prior returns.
Perhaps, but there is also ample reason to believe that some of the biggest winners in the 1996-2000 period (“quality”) will not be worth the flight. Many principals made enough money that they aren’t working as hard at the new fund, and many made money more through good luck than good management.
Others will rightly point out that 2000 was anomalous in terms of the percentage of first-time venture funds raised. We were nuts then, with 40% of all venture funds being from people who had never done it before in a market than does not reward recency. Comparing Q1 2005 to 2000 is, to that way of thinking, misleading. It is the long-term percentage of first-time funds that we really want to know, and that is not in this data.
And there is a related argument. Contrarian strategies work in investing in venture capital, just as they can for a venture firm partner’s investing. If traditional strategies are looking tired, then what better way to find people with access to different deal flow, different stages, different geographies — or different anything — than by going against the flow, say to people promoting first-time funds. Granted, you would never want that percentage to get back to 40% of all funds raised, but there is nothing wrong with seeing it tick along at current levels, or even a little higher.