More on the state of the VC industry
Bill Gurley in his abovethecrowd.com blog has a fine summary of what is going on with the VC industry and where is it going. I don’t think there are any new thoughts here, but it put a lot together and makes some pretty credible sounding predictions. One prediction is that the VC industry could become half the size it currently is. He says,
the VC industry will shrink in kind. How much will it go down? It is very hard to say. It would not be surprising for many of these funds [the pension funds, endowments and foundations that invest in venture funds] to cut their allocation in the category in half, and as a result, it shouldn’t be surprising for the VC industry to get cut in half also.
Another prediction is that it will take a long time to get there. He says,
The VC industry has low barriers to entry and high barriers to exit. Theoretically, a fund raised in 2008, where all the LPs have no plans to commit to their next fund, may still be doing business in 2018. VC funds have long lives, and the point at which they decide to “not continue” is usually when they go to raise a new fund. This would typically be 3-5 years after they raised their last fund, but could be expanded to 5-7 years in a tough market.
The Bill Gurley says something that I find very counter intuitive. He says that Silicon Valley is not likely to notice much. He says,
How should Silicon Valley think about these changes? It is important to realize that there are approximately 900 active VC firms in the U.S. alone. If that number fell to 450, it is not clear that the average Silicon Valley resident would take much notice.
Why this would be the case is not at all clear to me. I would think the more likely outcome, if his analysis is correct, is that there will be a long flat period of low (relative to the recent past) investment in innovation as a result of which the innovation side of the economy will shrink or change.
What I think is that 10 years is way too long for any trend to persist undisturbed in its pure form. Outside events will intervene in unexpected ways.