The Venture Diet Is Working

The 2009 data on venture capital investments is out now. PWC, along with its partners the NVCA and Thomson Reuters, report that VCs invested $17.7bn in 2009 in the "Money Tree Report."

I think that's a pretty healthy number. I've written in the past that $15bn per year is a good number given the "Venture Capital Math Problem."

My concern is that investing went up in the second half of the year to a $5bn/quarter rate, which is $20bn run rate, a bit above the number that I think is optimal for the industry's returns.

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.

Stay tuned and find out which one it is.

Reblog this post [with Zemanta]

#VC & Technology

Comments (Archived):

  1. greenskeptic

    Interesting to note NCVA Prez Mark Heesen’s comment in the VentureBeat article (I love Zemata!) about his expectation that money will start to move back into the three sectors that offered the most promis pre-recession: cleantech, life sciences and IT.He also noted that the “seed and early stage pipeline needs replenishing across all industries and the health of the startup community in the next decade will be dependent upon more robust first-time financings.”Do you agree with his assertion that 2010 will be the year that process begins in earnest? And how do you think that will effect the run-rate?

    1. fredwilson

      I haven’t noticed a dearth of early stage investments in the web sector soI’m not sure how to answer that

      1. greenskeptic

        I think you just did!

  2. marklittlewood

    If any of that money wants to swing on over to Europe… :-)Data is always useful. You might like to look at this info which records reported deals by country over the past 6 years in US and Europe. You can upload the spreadsheet with the raw data. If you do anything interesting with it, happy to be credited ๐Ÿ™‚ and would love to see what you put together.

    1. RichardF

      +1 to that mark

    2. Mark Essel

      Checking out the link Mark, thx for sharing it ๐Ÿ™‚

    3. jodowns

      In Europe the reverse seems to be happening. Lack of LP investment in funds is not really doing much for the poor overall returns that funds are showing. The, ‘there is too much money in the system’ argument could only seriously come from a VC? Love the chutzpah.

  3. andyswan

    Hopefully it moves up to $50b AND returns are excellent. It’s time for another epic innovation cycle that creates massive wealth on a global scale!

    1. RichardF

      great thought Andy !

    2. Mark Essel

      Amen to that Andy!

    3. fredwilson

      Hope is not a strategyWe tried that in the late 90sDidn’t work

      1. Mark Essel

        Not hopes fault, just a lesson in size over monetization.

      2. andyswan

        Well….I’m not a VC….so my “hope” for your industry has no effect on MY strategy :)I think it’s always a good mental exercise to replace “or” with “and” and see what happens. Worth a thought experiment on a Friday at least.

        1. fredwilson

          It does. When there is too much money sloshing around everybody gets hurt

          1. andyswan

            I think many of us on this thread would love to see a post on this, because from the entrepreneur perspective, it’s difficult to imagine that more investment dollars available isn’t a good thing for the innovators.

          2. David Semeria

            Well put Andy. Like in traffic jams, entrepreneurs would just like all the other cars to go away.

          3. Carl Rahn Griffith

            Thing is, David, are we all driving by Roman/Parisian rules of the highway etiquette? ๐Ÿ˜‰

          4. David Semeria

            Lol Carl. But if you and someone else are both chasing the same chunk of cash, are you really going to say “no please, after you…” ?

          5. Carl Rahn Griffith

            We’re British old chap, of course! I’d doff my tweed cap, peep the horn of my Morris Minor and let the pushy so-so in the hot-hatchback go through.Or then again, lol ….

          6. Mark Essel

            Are we all chasing the same pile of cash, the same value though?The more potent the network effects become, the more highly interactive system solutions can be. I’m already using Twitter, Zemanta, Alchemy, Rackspace, 37 signals Rails, WordPress, and 30 or so other open tools. The pile I’m chasing, is really the pile I’m building and I’m more than happy to share it with any folks who can help me make it a bigger pile :D. Wealth can be created, it’s not a fixed quantity.

          7. David Semeria

            But someone has to pay the bills whilst the tools are being built and rolled out, regardless of how they’re eventually monetized.

          8. Mark Essel

            True true, day jobs are the fire that keep the Jekyll and Hyde founders warm.

          9. Aviah Laor

            I’m a little nervous to answer with a simple one here, (still working on billing the sun :D), but however: too much money just drive the prices up. simple as that. Everybody will charge more: the valuations, employees, service providers, hardware, software… The cheap tools to build a start-up are one of the good effects of the bubble crash, where no money was out there. Investor just burned the money too quickly. Lower costs provide more opportunity than too much money

          10. Jacob Brody

            When there’s too much money it’s great for entrepreneurs who can see their brain-children get funding and development, plus they’re able to take a salary. Three years later, while more startups might succeed a higher percentage of them will fold. The abundance of money will also cause valuations to increase, which will lower the returns. That’s not acceptable to the Limited Partners like State pension funds and school endowments who invest in VC firms. Because venture investments are a risky asset class, investors should expect higher returns on successful investments than they could picking a good public stock.

          11. Mark Essel

            Fred gave me some interesting rationale, he could bring that back in a full post.Over copy/competition, so innovating companies are exhaustively copied with variations. I do think copycats can’t just do the same thing though, they have to spin it.An pretty telling example, Foursquare and Gowalla. I use Foursquare because it was first, but if Gowalla did something else that pushed it over the edge I’d swap without losing sleep over it.

          12. andyswan

            “competition? ย We have no competition!” ย ๐Ÿ™‚

          13. Mark Essel

            sounds like a good post title ๐Ÿ™‚

          14. Aaron Klein

            “and our conservative projections say we’ll be at $100MM in revenue within five years” ๐Ÿ˜‰

          15. Paul Kedrosky

            Until venture starts delivering competitive returns the asset allocated to it by LPs will shrink. An industry that doesn’t deliver competitive returns to its investors isn’t sustainable, and therefore can’t help entrepreneurs.While you might say “then make better investments”, the reality is that venture, given ten-year fund cycles, is still suffering from capital inflows in the dot-com daze. We are only now approaching pre-bubble normalcy with respect to a pace of investing that delivered competitive returns in 1997 and earlier.

          16. andyswan

            In other words….the market will dictate how much money flows into venture. ย Couldn’t agree more… my “hope” that those numbers double is really a hope that startups create double the wealth.It’s not that ambitious.I’m certainly not going to hope less money comes in so returns grow and attract more money (back to where we started).

          17. Mark Essel

            That makes perfect sense Paul, but like Andy I gotta believe founders will find a way. Or the world could use more founders (and maybe smaller business structures).

          18. Evan Rudowski

            I was there in the late 1990s and I’ve gotta agree with Fred. Too much money led to the creation of a lot of crap. When you have so much money sloshing around, the definition of “entrepreneur” degrades to eventually mean “people chasing money.” Suddenly everyone, not just real innovators, is a so-called “entrepreneur” because they all want to feed at the trough. Ideas are driven by ability to attract VC interest rather than sustainability. And it makes it much harder for the good stuff to rise to the surface above all the dross.So too much money is not good for real entrepreneurs, it actually hurts them. What you want is just enough money to make you sharp enough at your game to be able to get some because your effort actually deserves some. Not because you’re a cynical player going after a pot of dumb money.

          19. andyswan

            That’s excellent commentary, thanks.

          20. Carl Rahn Griffith

            ‘Excessive’ early-stage funding may also add to the risk of complacency sitting in, expensive ‘Suits’ coming on the payroll way too early, etc.

          21. Aviah Laor

            This is the point, the “bubble point” is where the suits come. In 2000 they came to early stage, now later stages are hot spot. Luckily, since the industry matures, there are many founders-turned-VC/angels that can hold the stick in both sides for the early stage.

          22. Evan Rudowski

            Yes well you probably remember the joke at the time — once the bubble burst the definition of B2B became “back to banking” and B2C became “back to consulting.” Funny because it was true.

          23. Aviah Laor

            YES!! LOL

          24. Evan Rudowski

            Yes, it happened a lot and unfortunately in some cases founders of good companies took their eyes off the ball because they thought the Suits were moving things forward. Sometimes they were, but often it was right into a brick wall.

          25. jonbeverley

            Absolutely agree with this sentiment. Having ‘been there, done that’, as a young entrepreneur ten years ago, raising $10MM felt like all our Christmases had come at once. But what it actually meant was that all this money sloshing around didn’t force any focus on the business. It was great for experimentation, the early years felt like some sort of college lab, but for business-building? Useless. Just enough money makes you much more lean and focused. These days, I’d rather have slightly too little and get into good cashflow management practices and keep things lean than have too much.

          26. Jake Howerton

            This sounds more like the problem is the inability of the VCs to rationally judge opportunities in front of them.

          27. Evan Rudowski

            Yes, absolutely, there was (and still is) dumb money — maybe less of it today than back then. Certainly with lots of money sloshing around there are more people who will anoint themselves VCs just as there are more who will anoint themselves entrepreneurs. They reinforce each other. I suppose that’s partly Fred’s point — when the level of VC investing stabilizes there is less of this behavior around, which is a good thing at both ends of the spectrum.

          28. Jake Howerton

            Right. My point is that the ideal situation has nothing to do with an arbitrary value range for the industry as a whole. The ideal situation is that these 3 things should grow in lockstep:1) VCs ability to evaluate deals2) Individuals ability to self select as entrepreneurs3) Funds available to be risked on these venturesIdeally a bigger portion of our economy should be delivering new value to consumers and businesses and creating more wealth. The only way we can test if we are ready to grow is to pump up #3.

          29. Evan Rudowski

            Yes but an important success factor for a business is its ability to manage cash effectively — so from that standpoint the availability of more cash does not necessarily lead to more success — but often to greater excess. It doesn’t necessarily follow that more funds risked delivers more value or more wealth. It’s about finding the right level of funding.The amount of excess I saw with my own eyes in the late 1990s really makes me able to say with conviction that more money can just as easily lead to more stupidity. Are VCs inherently any smarter a dozen years later? Are would-be entrepreneurs any more thoughtful or reflective? I don’t think we’ve advanced that much. If we could only eliminate human nature and human frailty from the equation, your scenario might work.

          30. Aaron Klein

            I think the bigger issue is that the extra money flows to people who think they are VCs but actually aren’t. So it dilutes the returns of the asset class as a whole and gives it a bad reputation to investors.

          31. kidmercury

            four words: austrian business cycle theoryABCT tells us when investors have too much money they make bad investments (aka malinvestments). they fund the wrong things, misallocate dollars. their perception is skewed because money supply has been distorted. this results in a bubble. then we need to clean up the bubble….better to just avoid the whole mess to begin with.

          32. ShanaC

            There is some risk of that now in general.

          33. andyswan

            I was thinking the same thing about both the money sloshing around and the danger of “hope” as a strategy….Can always count on ShanaC for the zoomed-out view ๐Ÿ™‚

          34. ShanaC

            Of all people, I believe in hope above all. No hope, no point in doing much of anything. I’m just aware of excess giddiness.Ok, we know that the interests rates have to rise (at some point, soon). But if you talk to random people and read the press, I don’t think the Fed is going to yank them fast enough. They have a problem with unaligned interests (interest rates versus unemployment, and the economy is doing funny things in certain states, plus the government now owns stocks in the companies based in those funny states). If you wanted to just manage bonds towards interests rates, that would be fine, but as long as you have this interest as a passive shareholder in companies and have an interest in unemployment, you may push towards slight inflation (I do think the fed is scared of runaway deflation and runaway inflation)So you might want to scale back on the predictions. Just thinking about this aloud.Also, why would you trust a random 23 year old art student. I mean I would have gone back for economics. (and I am thinking about pulling an Alan Greenspan at some point, I do like arguing about the subject, and I may have a knack for it, but I really can’t say for certain: I do know I would need to brush up a good deal on math to perform the way I want to.) The majority of people here are professional investors and professional entrepreneurs with far more life experience and far more training. I’m just thinking. Aloud. I’m green behind the ears. You might want to think about that. If you think I’m good for someone green behind the ears, great wonderful, you might want to do some steering, If you think I am a know-nothing, you should also do some steering- only way to learn of course.Back to the books.

    4. Invoice factoring blog

      Only if it’s sustainable though. Otherwise you have too much money chasing too few deals or a bubble. Bill Gross (one of Pimco’s guru’s) keeps talking about a “new normal” economy with lower returns and higher risks. We shall see I guess. –Marco

  4. thewalrus

    how about we limit the number of startups back to healthy number? surely the current level can’t be healthy…..look at all of them that don’t make a healthy return for their founders. less startups would make a healthier and profitable ecosystem for everyone.sorry for the sarcasm, but you are asking to limit demand but have unlimited supply….shifting all power to the investor side. this is your first post (in like 4 years) that i find annoying….in that mark cuban kinda way….

    1. Mark Essel

      I was a little confused as well. If money is fighting into the VC market, it means that it’s more attractive than alternative sectors.

      1. David Semeria

        This is one of the areas where VCs interests necessarily diverge from those of entrepreneurs. I don’t think anyone on either side of the fence has a problem with that.

        1. Mark Essel

          An overabundance of Venture Cash could easily be handled by changing how VCs are paid. Lower base salaries to that of founders, and pay a higher performance bonus. Only effective firms will be rewarded forcing out poor performers. Then it doesn’t matter how much cash wants to get into the Venture Market, there will only be a limited # of solid venture firms.

          1. David Semeria

            Sure, but you have timescale issues. Unlike with hedge funds, VC LP’s are locked in for a long-time. This makes the sector slow to react to normal selection pressure.

          2. fredwilson

            Not so simple. There’s a natural limit to what one early stage vc can manage

          3. Mark Essel

            So the extra money that is fighting to get into the system (if this is an appropriate description) won’t have anywhere to go but unknown or poor performing venture firms. Sounds like a great place to be if you’re part of a great firm with a proven track record (cough USV). Limited partners will be fighting to get their money in your fund first.As usual, you’ll be competing to create solid relationships with founders who build something that fits within your fund pattern. Again, funds with a proven track record are more likely to attract sharp founders. Why make a deal with someone you’ve never heard of, whether it’s a partner or an investor. (disclaimer I met Tyler on wave ๐Ÿ˜‰

          4. valto

            We are going to challenge this model, so the extra money can get into the system in a smart way.

        2. ShanaC

          How about, a lot of people are bad at budgeting, especially projected budgets. That would be a much better post. How do write up a projected budget- it’s useful in all fields of life. Knowing where a middle ground is and to take a middle path is generally good for everyone, if only one had a vague roadmap.

    2. fredwilson

      I’ve been writing about this topic for a long time (like the post I linked to)

      1. marko

        i thought the previous posts were presenting the numbers and arguments….this one i take as ‘lets try and get to the common goal’ (which i happen to mostly disagree with) ….which reminded me of most of cuban’s writings lately.but hey, i prefer an artist over a critic anyday….maybe i just need another cup of coffee this morning ๐Ÿ™‚

        1. fredwilson

          Well I wrote it on the redeye after failing to get much sleep. If I appear to be cranky, I am

          1. Mark Essel

            I used to sleep in after the red-eye and take the day off. Ahh the good Thursday night redeyes back from LA… Poor decisions on a sleep deprived mind always cost me more than what I gained by being at work.

  5. MarkRo

    Fundraising remains difficult for ‘most’ funds so I don’t see investment ramping up.

  6. Mark Essel

    Fred,How does an over availability of cash affect your fund? Is their more market pressure to accept worse deals? As a founder, don’t I want cash fire hosed into the ecosystem? Does it negatively impact me if other startups get too much funding?Trying to get my head around too much “cash supply”.

    1. fredwilson

      Yes its awful. You do something clever and copycat VCs fund five teams to knock you offLook at gowalla. They knocked off foursquare and then raised 8mm dollars!Foursquare couldn’t spend 8mm dollars if they had tooIts nuts

      1. ShanaC

        for a cranky guy you’re being polite- but remember: It’s your job just to keep the ship running faster and better, and to do that, you might need to not be so concerned about what the competition does to a point. If they are being silly that is their business.(though I happen to agree with you, bad web interface, which is a bad starting point because you can’t assume that everyone has an iphone. Though I did just see my first GoWalla checkin..I keep track of such odd things.)

      2. Mark Essel

        Jeez, vicious knock offs with deep pockets after a little traction is trouble. It means founders can’t just successfully build something, and get rolling. They then have to out pace this new realm of near instant appearing competition. I can imagine that’s a pain in the butt for the Foursquare founders.But it’s probably good for the market. Even if I’m first to discover a fantastic service, if I can’t execute best I lose out on market share.

      3. kidmercury

        damn boss you’re droppin’ some serious hate on people today, glad to see ityou ever wanna collab on a diss track just holla

        1. andyswan

          I like it when Fred is grumpy. People learn through disagreement and challenge….I’d rather be wrong, push someone’s buttons and learn something from them.

          1. DonRyan

            Grumpy folks tend to get straight to the point and speak honestly. Much like folks who have indulged in an adult beverage or two. It helps cut to the chase. I prefer it.

    2. Kevin

      I was wondering the same thing Mark.My gut is that too much cash = poor decisions in most cases unless the investors are pretty disciplined and experienced. Too little means you’re handcuffed and can’t execute. Finding the right balance is important and unfortunately my experience is that investors in your projects/funds tend to do the exact wrong thing at the exact wrong time. They want to invest when things are too ripe and don’t want to when there is genuine opportunity. Like now.Too much available to you is like going out on a Saturday night with a lot of cash in your pocket. You’re not likely to come home with it.

      1. fredwilson

        You are sooooo right about this.Most investors are sheep. They follow the herd and don’t have an original idea in their brains. They are scared when they should be confident. And they are confident when they should be scaredBut there are some (buffett comes to mind) that are truly exceptional

        1. Kevin

          Of all the things I’ve read about Buffett the thing that impresses me the most is his teams’ ability to make a decision very quickly. Supposedly they make major investment decisions in a day or two at most, and many times in hours. I can’t say I do. They obviously know what they want and know what metrics and people are key to telling if they’ve found it or not.

          1. fredwilson

            They mostly invest in industries they understand well. When you do that, you can invest decisively and with convictiion

        2. Carl Rahn Griffith

          In my own (very modest levels of, in this context) experience, that is so true, Fred.

        3. ShanaC

          A)Something to be said here: If you are reading this,. you should know you should never stop learning new things.B) Why are people scared? And then how do you fight the fear?

        4. kidmercury

          just commenting to drop the obligatory buffett diss in response:Warren Buffett, Government Propagandist by Karen De Coster

      2. Mark Essel

        Hahah, great way to describe it Kevin. Certainly don’t want to overload on a round of fund raising before the business is ready to use it.

    3. Carl Rahn Griffith

      “What is a cynic? A man who knows the price of everything and the value of nothing.”- Oscar Wilde.

      1. Aviah Laor

        Ha! here is cynics perspective:2009: $17.7B in 2,795 deals2007: $30.5B in 4,027 deals…2000: $100B in 7,913 deals.Those were the days.

        1. fredwilson

          i sure hope we don’t ever see a year like 2000 again

  7. zackmansfield

    I may be missing something, but aren’t we talking about two (related) but distinctly different things here? In your VC Math Problem post, you note that the amount of capital raised by VC’s from LP’s had grown to a level which you felt was unable to deliver the types of returns necessary in the asset class. But here we’re talking about how much $ was deployed into VC-backed companies in one particular quarter. Now i understand the two are interrelated – which is actually my point. Wouldn’t it follow that since VC’s raised a ton of capital over the last few years (31B, 35B, 28B), that the amount of capital infused in the system has to increase at some point – the capital simply has to be deployed. As David Semeria noted, the length of investment horizon for VC funds necessarily makes it a slower adapter to overall capital market trends. btw, I think the discussion around the “right” amount of VC in the system to generate appropriate returns is an important one. Just don’t think the two posts are as easily compared as it may seem at first glance.

    1. fredwilson

      I think the two numbers are fairly well correlated. Most VCs invest their fund over three to four years and then manage/harvest in the remaining years. Its not exactly correlated, but it is pretty close

      1. zackmansfield

        yep, that part makes sense. But my points is that investment, whilecorrelated, is lagging. Comparing amount of $ raised from LP’s YOY seems tobe more meaningful for your VC math assertion.Further to this point, it looks like VC’s raised $15B from LPs in 2009. This seems to be a “healthier” level for appropriate returns.

        1. Brett Topche

          I agree that $$ raised is the more relevant number than $$ invested. Once a fund is raised, it will be spent. When the money is put out is simply a question of timing. If the amount of money raised by funds remains static but the amount invested by those funds into companies declines, it just means that there will be a burst of investment activity later, as funds that have already raised money but not spent it approach the end of their investment period and have to “use it or lose it”.

        2. fredwilson

          yes, exactlybut note that the $15bn and the $17bn are not far from each other

  8. kidmercury

    interesting to see what happens. aggregate money supply measures (i.e. MZM, M2) are currently declining, which would suggest less money for VC funds, although i think the reason money supply is declining is due to less borrowing and lending to consumers. the banks, hedge funds, and other owners of government of course don’t have that problem, so i’m not sure where VCs will fall for the remainder of the year. the true test will be in march/april when banker bailout (i.e. “stimulus”) ends. then i think we’ll see the casinos go back down and risk aversion will be in vogue. does risk aversion at any point over the next few years mean fleeing the US dollar, i think the answer is increasingly likely to be yes so long as the status quo remains (status quo = out of control government + willfully ignorant population)

    1. ShanaC

      There is a fairly well sloped yield and a lot of money locked up in the banking system (at least in theory, and we don’t what corporate, especially higher end coprorate debt accoutns look like) I do know from asking that the parts of the 30 day bond market have mostly recovered (which was an essential debt instrument tool)And I should study more about bonds….I don’t risk aversion will ever be completely in vogue. I think risk types will shift, it’s how you got overproduction of capital in one area of the market in the first place.

  9. RichardF

    As a follow on question to Mark Littlewood’s comment, are the US funds limited to investing in the US and if not why do you think some of that excess money is not flowing overseas Fred? Particularly in web investment, as the internet is a global market. I’d have thought some of the Asian countries, where the local markets are huge, that there must be some great opportunities.

    1. fredwilson

      We’ve got three european investments and one in israelBut distance is a problem for active earlu stage VCs

      1. marklittlewood

        This is very much the exception though – most US firms are investing their money closer to home. It seems that it is more common for European entrepreneurs to up sticks and head to the Valley, San Diego (esp life science) and increasingly the East Coast of the US in order to get access to funds and markets than it is for VCs to come over here.

    2. marklittlewood

      Some funds are limited to investing in particular territories and some VCs will invest outside their home territories although as Fred says, this is harder to manage.Weirdly, I wrote about this earlier in the week and there were some interesting comments from others. Simply, venture is a very tough business to scale.

      1. RichardF

        thanks for the link Mark, good blog

  10. Aviah Laor

    Will the diet break on series B bubble? (some digging into the report’s internet early stage data).Average investment per early stage internet deal, for years, is aprox 40%-60% of investment in other deals. In 2009 Q1 a rare situation occurred: avg. early stage investment almost equals others deals, $4.1M vs $4.3M (happened only a few times in the last decade).Now, in Q4 2009 the gap returned, avg $3.0M (down!) for early stage vs. $5.7M on other deals.Early stage is probably not going to bubble: it’s common knowledge now that at seed advice and mentoring are more valued, you need to be “lean”, and there are many early-stage investment groups that put support and veterans experience over money. So does the bubble move upwards? next series are over valued? after all series B,C and D provide much more reasons to throw money: expansion, bring in traditional and expensive management etc. Maybe after creating a reasonable market for seed-A series, focus should move next.

  11. Tim Roberts

    I don’t agree that over investing by VCs is necessarily ‘good’ for entrepreneurs on numerous levels. For those that get funded it makes much more noise and confusion in the space (per foursquare/gowalla comment), makes hiring harder and creates many more business chasing a finite number of opportunities. you could argue that over investing actually creates more startup failures. too many hungry dogs in the pack fighting for not enough food.

    1. David Semeria

      That’s an argument against funding me too ideas, and even then it’s not cut and dried. Facebook was definitely not first out of the blocks, for example.In a perfect world, only good executors would get funded, but, of course, you can’t know the future execution ex-ante.This explains why in tough times serial entrepreneurs have a funding edge over first timers.

      1. Carl Rahn Griffith

        Yup. You can ‘buy’ a pretty much sure-fire successful Execution. However, a bona-fide Epiphany is a pretty rare thing.

        1. David Semeria

          Um, not sure there’s such a thing as “sure-fire” execution – at least not in startupland.

          1. Carl Rahn Griffith


      2. awaldstein

        This is an important point. “Execution” is essential and there is no other way to really guage it except by success and even then its a gamble.Would be interesting to see the breakdown of serial to first time entrepreneurs. I bet you are correct that repeat entrepreneurs are getting first seat at the table.

        1. David Semeria

          For pre-launch or pre-traction situations I would bet my house on it.

          1. awaldstein

            Yup, we agree.Creative execution is the ‘x’ factor to every success I’ve been involved in. Requires that mix of experience, unfettered creative thinking and maniacal attention to detail. Customers really define the product, strategy provide the guidelines for directional decisions but execution is the infantry that wins the day.

  12. gellert14

    I think the 4th quarter, which saw $6.3BN in invested capital (according to DJ Venturesource), is the most relevant data point here (which isn’t good, as it points to the $25BN in invested capital). Few funds were actively investing in the 1st half of 2009, so I think it is tough to look at that time period. That being said, various funds are now being rightsized and there will be more to come. It will be interesting to see where the 1Q10 numbers end up. That will be a very telling data point.

  13. Lucas Dailey

    Iโ€™m sure you are correct about the health of the VC industry, your many posts on the topic are well reasoned. However there is a difference between the health of VC returns and the *benefit/utility* created by of the industry.Yes, an obese and inefficient VC industry will cause the $ cost of Innovation to increase. But the *total Innovation* will still be higher. And in terms of the common good/consumer utility, people will benefit from more total Innovation.More VC $ = Bad for VCs, good for the rest of the world, yes?

    1. Aviah Laor

      The question is just more $ but how it is distributed. If the money is well distributed to more VCs that will further find new markets, new channels it is good.But if the extra $ is going to the same players, the same deals, the same directions than instead of creating value you just driving prices and valuations and costs up without creating real value (take Wall Street for an example)

      1. Lucas Dailey

        Surely at least some of the extra $ would go to a worthy and otherwise-unfunded company. Even if that wasnโ€™t the case, and as you say the money *only* goes to the same people thus raising prices and valuations, that is still a good thing for overall innovation. By creating greater potential reward you will have more potential entrepreneurs willing to take risks.

        1. Aviah Laor

          I’m with you that a lot of innovation is still to come, and pursued. But more often than not money flood in based on a real innovation that is pimped x100. “A random walk in Wall Street” starts with a great exploration of bubbles in history – the word was first used in for financial schemes in the 18th century! It’s always a spin of real innovation that finally used to melt down common people hard saved money. At the end of the day it’s people money you pour in. Innovation- yes, more investments – absolutely, value should be proportional to input.

      2. fredwilson

        right, that’s why i’d like to see more of the LP’s money invested globally and in startup hubs in the US outside of SV

    2. jonbeverley

      Total innovation will be higher, agreed. But total effectiveness of those investments will be lower. More VC $ = inflated money into startups (and let’s not forget Fred is mostly in early and mid-stage), which means more sloppiness, laziness and lack of focus.Yes, innovation will increase, but in a collegiate way, not a business-building, P&L-focused way. At least, that’s my experience.

    3. fredwilson

      maybe that’s true. my friend Tom Evslin’s blog,, has this tagline”nothing great has ever been accomplished without irrational exuberance”

  14. David Semeria

    Fred, your analysis has of the US VC industry has always been bottom-up, based on how many ventures it can realistically invest in whilst maintaining an acceptable risk-adjusted return for its asset class.But there is also the top-down argument. If a certain percentage of total US managed assets are allocated to VC, then the money has to go somewhere.Combining the two arguments, and factoring-in your response to Richard Forster’s comments, is there not a case for US VC (as a whole) expanding overseas?I’m not talking up my own book here – Italy would be last on the list anyway – but since web & tech is a truly global business, and most of the investment expertise still resides in the States, is this not an opportunity for the US to export its cash and expertise?

    1. fredwilson

      yes indeed. that would be a good thing. we need local VCs to do it though. too hard to do early stage from 8 hours away

  15. Morgan Warstler

    If the government wasn’t in the damn way… ie SOX, GM, TARP, etc… we’d have plenty more creative destruction going on.That’s my issue… as a “capitalist,” Fred, as a believer, you should be banging that gong much more than you are.

    1. fredwilson

      i think SOX is a non issue at this point

      1. Morgan Warstler

        That’s a post I’d really like to see.

        1. fredwilson

          ok, i’ll work on it. quick summary is that the accountants and finance execs are now up to speed on it and have figured out how to live with it fairly efficiently

  16. Anonymous Coward

    I like your blog, Fred. But this post seems obviously self-serving: with less money available to companies, it’s a VCs market and you can (personally) make more profit. It will always be in companies best interest to have more money available, period.

    1. fredwilson

      i’m sure many see it that way. but go read that “VC Math Problem” post. if you look at the numbers, you’ll see that you just can’t invest much more without wasting the money. and i think wasting money is not healthy. it should go somewhere more productive.

  17. Josh Auerbach

    I completely agree that a smaller venture capital business is good for returns to investors in venture capital. And I do think that it brings some discipline to the start-up world — better ideas and more talented entrepreneurs will be funded, and worse ideas and less talented entrepreneurs will not.But: there are a few other factors here worth considering. Greater access to VC money lowers the cost of capital for start-ups. In the immediate term, that’s good for founders: with cheaper capital, they can keep larger stakes in their companies and/or raise more money for a given level of dilution. The lower returns to the investors — the buyers of venture equity — translate (roughly) to higher returns to entrepreneurs, who are the sellers of that same equity.More broadly, though, it’s worth considering where the VC money would have gone otherwise. Personally, I believe (without any supporting data, I should note!) that start-ups can contribute more to GDP growth for a given investment than can other uses of that funding. As an American, I’d rather see the incremental $5 billion go into VC investing than into, say, developing single-family homes. But in fairness I should leave that sort of analysis to the economists…

    1. Michael A. Jackson

      Josh, I think what your last paragraph alludes to is venture capital as an economic development tool, which is not the same as venture capital as an asset class. Putting more money into an asset class that has been underperforming as a whole the last several years will do nothing more than exacerbate the problems. You’ll end up with lower calibre investors entering the business, which will lead to lower calibre businesses getting funding.I remember seeing a stat a couple of years back showing that when the number of businesses that received funding increased, succesful exits (in the graph it was listed as more than a 1x return) as a percentage of the overall total decreased, i.e. the success rate didn’t remain constant. As Fred’s post on the venture capital math problem shows, venture is not infinitely scalable. Instead of having governments getting in the game of allocating money to venture, it would be more useful if taxes, regulations, and laws were streamlined to benefit entrepreneurs and small businesses more.

    2. fredwilson

      let’s throw out the D in GDP and talk about GWP, the W being “world”i think we’ve got enough VC here in americawe should be talking about how to fund more innovation in other parts of the world

  18. valto

    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.

    1. fredwilson

      exactly right. we should be exporting our excess venture capital to places it could make a phenomenal return

      1. henry

        I hope by phenomenal return, you aren’t just talking capitalist greed, but also from a value proposition on a grander scale. e.g.- how to make the world a phenomenally better place for all of it’s inhabitants.

  19. rafer

    Fred, I don’t understand how you can say the diet has even started.The problem isn’t money invested; it’s money under management. That figure hasn’t really moved. A downward trend in money invested is certainly a leading indicator, but it leads by years. And, people dying to keep their management fees act out with their checkbooks in some wacky, counterproductive ways on the way down.

    1. fredwilson

      the number to watch is uninvested but committed capital. that is going a lot actually.

      1. rafer

        Greater precision than my comment. Thank you. That figure is not in the MoneyTree, is it?And my main point is that we shouldn’t give people the impression that the system correction will be complete in months. It’s years away.

        1. fredwilson

          no, i don’t even think they ask for itwe don’t participate in any of those surveys though so i can’t be sure

          1. rafer

            Then where’s the “uninvested but committed capital” come from?

          2. fredwilson

            i don’t think anyone reports itthey should

          3. rafer

            So, you just smell the stink of fear coming off the Tier 2 and 3 folks? ๐Ÿ™‚

          4. fredwilson

            i see it in the marketmany funds can’t put more money into deals they are in

  20. energiejobs

    I am sure that especially Cleantech and Biotech will come back soon as an asset class. Like I heard from some private investors. Because they donยดt see much value in Bonds anymore.

  21. Dave Broadwin

    Not directly relevant to all the commentary, but don’t have too much faith in the numbers. We work a lot with numbers from DowJones VentureSource in our publication EEC Perspectives. We also draw from other sources as well, and we do primary research to supplement it all. Dow misses a lot of deals and they miscategorize a lot of the deals they catch. Based on our research, the Dow numbers are right — directionally, but they could be off by big percentages. My guess is that you don’t actually know (in fact can’t know because of the inaccuracy of the numbers) how much weight the diet has taken off (you don’t actually know how much you weighed when you started either). As someone in the chain below points out, all this analysis is complicated by the fact that it takes years for unsuccessful funds to wind down. Even worse, from a statistics point of view, as funds triage their portfolios, they open up money that was allocated to follow on investment for portfolio companies that got cut. This may have the effect of temporarily creating the impression of an increase of money in the system.

    1. fredwilson

      i’m with youwe don’t participate in their surveys

  22. fredwilson

    Yes. That’s a problem too

  23. marklittlewood

    You can download the spreadsheet at the bottom of this page.…It has numbers over 6 years by quarter, by country (or in the case of some of the little (:-) European countries, by sub-region).

  24. fredwilson

    maybe they could manage 20-25% more but i don’t see how they could double it. there’s not much leverage in the VC model