The Venture Capital Crisis

There is an uneasy feeling afoot in certain corners of the venture capital industry. While some geographies are seeing oodles of deal flow (even if much of it is whimsical and suspect), many areas are seeing virtually nothing, especially in information technology, the former stalwart of venture investing. Five years after the dot-com boom and some IT venture investors don’t know to make of the problem.

You see some of this in comments by Mark Skapinker, a founder of Delrina (the WinFax people), and a current managing director at Brightspark Capital, a Toronto-based venture firm. He says “…the new venture marketplace is in a crisis”. While Skapinker is admittedly talking about Ontario and implying that things are better elsewhere, most everywhere else venture investors are complaining too — and imagining that things are better somewhere else.

There is no doubt that the world of IT investing has changed. If, for example, you’re most comfortable creating enterprise applications (CRM and that sort of thing) and the like that you sell to the IT department, then you’re a guy investing in umbrella companies in a newly desiccated landscape. There just isn’t as much call for it (i.e., none) as there once was.

What to do? You can do one (or more) of five things as a venture investor:

  • You can close the fund. No-one does this. Some should, but none do.
  • You can change sectors. This is a fine idea, the sort of sensible thing that a venture fund would suggest to a struggling portfolio company, but the trouble is that venture investors people hate leaving their comfort zone. That’s why you find IT guys turned life science investors who see everything as a platform genomics play, or IT guys in the gaming world who only want to sell billing systems.
  • You can go upstream. If you don’t see the deals you want, then originate more deals. Climb deeper into IP. Shape deals. Many firms talk this game, but most don’t do it, can’t do it, and won’t do it. They much prefer meetings where they get to talk about how the venture investing process works, to meetings where they talk (knowledgeably and helpfully) about deep IP.
  • You can dump the partner. That is a sensible thing to do, but most firms won’t do it. I can count on one hand all the name-brand funds that have dumped senior partners who no longer had the right skill set, and couldn’t adapt to a new landscape.
  • You can keep soldiering on looking for traditional deals, hoping that either contrarianism or sticktoitiveness will eventally pay off. 

Can you guess which options most funds choose? I thought you could.

Related posts:

  1. The Venture Capital Overhang
  2. The Institutionalization of Venture Capital
  3. Shotguns, Rifles, & the Death of Geography in Venture Capital
  4. Newbies Flood Venture Capital (Again)
  5. Skewness in Venture Capital Returns

Comments

  1. brian says:

    I agree that your first point is accurate. Since off a $250M VC fund the managing partners get a 1-2 percent annual fee regardless of performance there is no incentive to close the fund. And for those in that predicament, I doubt they have greater prospects elsewhere.

  2. guy in toronto says:

    The dot-com hangover is alive and well in Toronto.
    Mr Skapinker and partners have already hit several home runs so they are not looking to fund anything but a grand slam. Entrepreneurs who proceed down this path find that the equity they will get out of a VC funded early stage startup is very low.
    The alternative is for a small group of people to get to a later stage before approaching a VC. The problem here is that there is very little cushioning for this, either from the government or from their own or angel resources. A lot of potential equity was lost when the bubble burst. They may also be stuck in companies started after the bubble that have not yet been successful. The result is that the pool of startups with potential is very small.
    VCs need to take more risk and get more involved at earlier stages to build up a critical mass of ideas. They need to be active in dealing with and bringing together proven people. Stop looking for the next big thing on a silver platter.