Venture Consolidation and Control

The good news?  Venture capital investment equaled $5.9B in Q2 of this year, up considerably from the $2.6B in Q2 of 2011.  The bad news?  The number of funds raising capital decreased to 38 (from 45 in the same period a year ago, an 18% drop).

The result, as this story (registration required) in the Financial Times aptly demonstrates, is that the venture industry is consolidating, with both fewer and larger funds – may of whom have now jumped the $1B threshold.  As this newsletter has pointed out often enough in the past few years, consolidation is the normal response to any industry at this stage — given after the boom of the 90’s and financial crises of the last few years.  The migration of typical venture funds towards later and larger investments is partly voluntary, and partly driven by the rise of super-angel funds, lower capital requirements, and the potential of new methods such as crowdfunding. But the tone of the FT piece is simple: VC’s are consolidating power.

This trend is both confirmed and contradicted in a piece published the same day in the WSJ, which notes that the top 10% of funds raised almost 70% of the capital in the first half of 2012.  Are venture firms consolidating power?  Not necessarily, as the WSJ notes that entrepreneurs are more likely to try to maintain majority positions in their companies through the use of different classes of stock with different voting privileges. “There is so much money chasing hot deals that founders are able to command better terms” says one VC.

On the one hand, venture firms have consolidated, increasing their power; on the other hand, for companies in high demand there is a unique ability to dictate terms.  In other words, the industry is moving fast and in different directions, and it’s a delicious tension if one can enjoy the ride.