The Coming Contraction

As I mentioned in a previous post, I believe the VC industry will contract mainly because some funds will have a difficult time raising new money from LPs in this new financial environment. Fred Wilson has a very good post on the “Math Problem” that the VC industry has and why the asset class will likely shrink because of it. One could argue that the Math Problem doesn’t apply as much to the life sciences sector since M&A activity remains relatively robust, but we’ll leave that discussion for another day. While less capital is good for LPs, it does make things harder for entrepreneurs trying to raise. As the industry emerges from the current financial crisis, I believe that capital efficiency will be the focus of most VCs, both in technology and life sciences. It’s not like capital efficiency wasn’t important before, but it will definitely be more now. For the entrepreneur, that means doing more with less. It likely means that fewer primary care drugs and more specialty drugs get funded. Unfortunately, it also means that fewer startups in total will likely get funded.

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