Three Strikes. Who’s Not Out?

There has been considerable press on the impact of venture industry consolidation for early-stage companies.  Less attention has been paid to the shifting dynamics between venture firms and their limited partners, and within venture syndicates.

First is the shakeout: fundraising is down — way down. Since just 2007, the number of firms raising new capital has dropped by 42%, and the amount of money raised declined a whopping 67% (see chart).

Second is a reduction in fees: even the limited VC firms that are raising money are no longer commanding premiums, and at least one is cutting its target in half and guaranteeing a 100% return in capital across the fund before taking any share of profits.

Third is increased friction within VC syndicates, with some firms just walking away from portfolio companies, much to the dismay of their funding partners.

Most indications are that the fundamental changes to the venture capital market will be more forceful than we saw after the burst of the tech bubble in 2000.  And why not – most VC firms raised money in the late 90s with the mandate to invest for a number of years.  Many of those funds are just now hitting the wall.  And when you have been going faster than you probably should have, the wall is damn hard.