While I’ve noisily been saying that venture capital has to shrink its way back to health, it didn’t need to listen quite so well. The third-quarter fund-raising statistics are out and they are, in a word, bleak.
The following figure shows the straight-outta-Wuthering-Heights bleak better than words. It is a parabolic rocket shot into the ground.
With the proviso that it’s possible LPs are just listening attentively to me and waiting for the signal to re-commence investing at historical levels, what is going on here?
It is a combination of things, including weak recent asset class performance, and, at least as importantly, a liquidity problem at major institutional investors. When you have to get liquid in a hurry you sell things, the most liquid things first, then the less liquid things, and all the way down. At the same time, you don’t re-commit to the less-liquid things, in large part because you’re newly petrified that you will soon need to be liquid again given how awful portfolio performance has become.
Think of it as VCs as collateral damage from the ongoing great recession, credit crisis, balance sheet collapse thing going on. They’re in the wrong place, with the wrong asset, and the wrong performance, at the wrong time – and it hurts.
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