2010 will be an interesting year. If VC investments go back up to $25bn to $30bn per year, then the diet didn’t stick and we are back to an overfunded industry that will produce subpar returns on average. If, on the other hand, the new normal is $15bn to $20bn per year, then the
diet worked and we’ve scaled back the business to healthy levels.
This comment relates to his earlier post about the “Venture Capital Math Problem“, where he explains about the problem that – too much money will make the whole VC industry to under perform.
I think this is similar problem than it is with food. In some western countries there is too much food and problems that are associated with that, like obesity. Yet in many parts of the world, people are starving. So if some markets in the world have too much money in VC, it does not mean there is too much money overall, it’s just wrongly distributed. I do understand that, there are also problems with having too much money per sector, so that nobody is getting good results, but that too is wrong distribution. Early VC money should always be going towards new innovation and not to be “me too in the popular segment” – there are plenty of problems in the world for entrepreneurs to solve & VC’s to be successful.
If we think that “Four Years After Founding, Kiva Hits $100 Million In Microloans“, I feel that it’s a strong indication that entrepreneurship in all shape and sizes can be instrumental on reshaping our world for the better.
There is a big gap between what Kiva.org is doing and with these problems of having too much money in venture capital in some regions. For us this shows that there needs to be much better distribution, more transparency and more activity in this segment overall – and this is exactly where we are focusing our efforts.
Here’s my dialog with Fred, on the “Venture Capital Math problem” 8 months ago:
Me: I think this just shows that money does not solve problems. The problem here is not too much money, but how it’s now distributed. VC industry is starting to look like the newspaper industry – better to wake up, the blogs are coming… Fred: What are the blogs of the VC business?Things like Y Combinator are great but they are feeding us even more opportunities so I see them as additive, Although I also see blogs as additive for the newspaper business if they’d just see themselves as curators and aggregators instead of content creators Me: I guess the closest thing to “blogs of VC industry” today are angel investors. But that’s for today. Also Y-combinator and the likes are great too and could be considered as “blogs of VC industry”. However their “next step” need to change away from just VC’s. The fundamental change will become, when there are “platforms” for anyone to start a “blog for VC industry” and that’s what we are doing in www.growvc.com. Overall, we feel that in long term the money will be spread to more potential start-ups and more of them will not go via IPO but just buy back of shares, mergers etc. with lower ROI. But that’s OK if the time for ROI is shorter and cost of management is lower. So – be more direct, spread wider, lower the management cost, speed up the ROI cycle and you can accept lower ROI. If you think about the structure of today, from where the VC money really comes from, you start to see the “big picture”. – basically it means that individuals like you and me pay for pensions funds etc. and these funds then invest to VC funds. VC’s then make investment decisions and “manage” the investments, all the way to take it public (hopefully). Basically just to sell it back to us… When more people will start to understand this cycle because of more info and transparency online (if they are interested), people will not accept this structure. Because in the long run what matter is, if the companies in question sell what matters. And that is not a question of size. Fred: Got it I hope this works It would scale much better
Related to this topic, below is a very interesting speech given by Fred Wilson at talks@google. You need to spare an hour to look the whole video, but I feel it’s well worth it. Just have some popcorn & coke and relax.
What makes it interesting to me, is that those industries that are going to be disrupted by internet in the future, currently have same issues what Venture Capital does, yet for some reason those would not apply to VC industry.