Venture capital firms are closing, decreasing the size of funds, or dropping partners, as a result of a worsening marketplace for start-ups to get to liquidity. As a result, the VC firms are finding it harder to raise money to invest:
Pui-Wing Tam, Venture Firms Take a New Tack
U.S. venture-capital funds garnered $20.3 billion in 2012, essentially flat from 2011 and down from $39 billion in 2007, according to Dow Jones LP Source.
Overall, there were 842 venture-capital firms in the U.S. in 2011 that raised money in the previous eight years, down 16% from 1,004 in 2007, according to the National Venture Capital Association.
More venture firms “realize that in order to be successful and deliver returns, they need to be focused on smaller groups of people and smaller sets of companies,” said David Hornik, a venture capitalist at August Capital, which in October closed a $300 million fund, compared with $350 million for its previous fund. Six partners are investing out of the new fund, down from seven for the prior fund, he added.
Many venture firms are responding to a higher bar from investors, who have been disenchanted with scant venture returns and are scrutinizing partnerships closely to pick out the stronger versus weaker venture capitalists in a firm.
Investors “have become more selective because their return requirements are higher.” said Tom Gladden, a partner at investment management firm Adams Street Partners, which invests in venture funds. “We’re going to evaluate the [venture firm’s] team to the point of looking at the personal franchises of individual partners.”
What is unsaid in this story is that investors the world over are finding it harder to determine where to invest. Uncertainty and ambiguity make it difficult to pick sectors or investment vehicles – like start-ups – with anything like a dependable return.