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Growthology

Too many sharks in the venture capitalist seas?

There are simply too many firms and too much capital. Too many little fish, or 'tourists', are trying the waters of venture capitalism and getting hurt, plus too many top predators keep competing against each other.

By Paul KedroskyGuest blogger / August 27, 2010

A Caribbean reef shark swims during a feeding dive off New Providence Island, Bahamas, in Aug. 1998. The traditional venture capitalist model is broken: there are too many sharks, and not enough fish to feed them.

Heather Sariego / Center for Shark Research at Mote Marine Laboratory / AP / File

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Provocative statistics from Diana Frazier of FLAG Capital this morning in PE Hub. She says the following about venture investing in the period 2001-2009:

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  • # of VC-backed companies started: 24,100
  • # of VC-backed companies with exits over $100m: 750 (3%)
  • # of VC firms: ~850

As she archly points out, there were fewer notable VC-backed exits in the period than there were active venture capital firms. Ouch.

Now, what are we to do with this? She approvingly quotes Mike Moritz of Sequoia, who says that "Tourists go home" in venture capital. In other words, it is a tough business, and efforts to make it more democratic have failed. There are simply too many firms and too much capital. I'm on side with that, of course, having argued repeatedly and wearyingly that the industry needs to shrink to health.

It's worth pointing out, however, that this was a woeful exit period. Further, most of the current crop of super-angel and micro-VC firms don't need $100m exits to move the needle on their teensy funds. They can happily exit at half that amount and still seeing solid cash-on-cash multiples.

What this speaks to, I think, it is the essential brokenness of the traditional venture business. There are simply too many apex predators for this market, and there aren't enough large fish. The venture industry needs to shrink, in other words, but most of the shrinkage needs to happen at the top of the food chain.

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