ELAINE: No, no.. but it is quite a coincidence.
RAVA: Yes, that’s all, a coincidence!
ELAINE: A big coincidence.
RAVA: Not a big coincidence. A coincidence!
ELAINE: No, that’s a big coincidence.
RAVA: That’s what a coincidence is! There are no small coincidences and big coincidences!
ELAINE: No, there are degrees of coincidences.
RAVA: No, there are only coincidences! ..Ask anyone! (Enraged, she asks everone in the elevator) Are there big coincidences and small coincidences, or just coincidences? (Silent) ..Well?! Well?!..
— Seinfeld, “The Statue” (April 11, 1991)
Dan Primack of PE Week Wire argued entertainingly this morning that venture investors are full of shit when they say that fund cycles are five and ten — five years to invest a fund that has an overall life of ten years. While that might have once been the case, it changed during the bubble to more like two years to invest, and it has never gone all the way back.
Dan’s explanation why? VCs can’t predict the future, so they end up investing faster than they expect. That’s why KP is fund-raising in New York this week, despite having just raised a fund back in 2004. To Dan’s way of thinking, all VCs are adrift at estimating their own investing pace.
Maybe, but if it was simply that VCs can’t get a good handle on their pace of investing, then you would expect a pseudo-normal distribution, with half of investors investing too quickly and half too slowly. What’s happening today is almost all venture investors are putting out money faster than they supposedly expected when they raised their fund. While it’s possible that it’s just a big coincidence, it would be quite a coincidence.
A cynic might argue that VCs are investing faster than they say they will because it’s a way of having more fee-generating money under management without raising larger funds. When you are earning lower returns from venture investing, and when LPs encourage you to raise smaller funds, it is perfectly economically rational to raise smaller funds faster to end up in the same high-fee place.
You could also argue that there is a tournament effect going on, with large pools of capital and a continued venture overhang leading to investors feeling like they must outpace one another to maintain position. Historically such was not the case, so the transformation of venture investing into a tournament has confused venture investors.