Andrew Anker on Friction
Andrew Anker has written a terrific post making some very solid counter arguments to my earlier post on How Much Is Too Much.
Andrew is absolutely right that it will take a lot longer for the venture market to self correct than a market with less friction like public equities. And he may be right that the venture market continues to be overfunded.
But I stick with my assertion that the venture market is getting healthier. I am heading into my 18th year in this business and it just feels like we are back to a normal market. The nuclear winter we were in for the past three years is clearly over. But i don’t see the crazy excesses of the ’98-’00 time frame either.
I spent some time yesterday with two VCs i know well. They are good VCs. But they can’t get a fund raised right now. They raised their first fund in the ’99 time frame when everyone could get money. They learned a lot, did some dumb things, but did some really smart things too. And they have good companies in their portfolio and a few that are going to be big winners. But the market won’t give them more money until they prove themselves with real cash returns. That’s the kind of restraint that didn’t exist in the bubble that does exist now and will cause the market to reach equilibrium.
I also think that Silicon Valley, where Andrew works, is home to more of the oversupply than the east coast, where i spend most of my time. Here is my back of the envelope math:
Let’s say that $20bn of new money is the most the venture market can really handle in any year. And let’s say that Silicon Valley is home to 60% of all venture deals. That says Silicon Valley can only take $12bn of new money in any year. If the average Silcon Valley venture fund is $400mm, then that means only 30 new funds can be formed in Silicon Valley in a single year before that market gets overfunded. I believe that there will be at least 40-50 new funds formed in Silicon Valley in 2004.
Let’s apply that same back of the envelope math to the NY tri-state area which is a market i know well. The NY tri-state area has traditionally been home to 6-8% of all venture deals. If you apply the 6% number to $20bn, that means that no more than $1.2bn should come into venture funds in the NY tri-state market in a single year. The average fund size in the NY tri-state market is closer to $200mm, and that means there can be 6 funds formed this year. I believe there will be, at most, 3 to 4 new funds formed in the NY tri-state area in 2004.
So that may be an explanation for why Andrew feels he’s in an overfunded market and I don’t. It may also be an explanation why there have been 6 to 8 deals in the NY tri-state market funded by Silicon Valley and Boston-based VC firms in 2003.
The bottom line – this is an important debate and i am glad we are discussing it.