Paul Kedrowsky of the Kauffman Foundation recently published a not-so flattering article about venture capital, Right-Sizing the U.S. Venture Capital Industry. He outlines why the VC industry will likely shrink over the next few years. His argument is simple: VCs must offer investors competitive returns for the industry to be viable. Unfortunately, VC performance has been relatively poor since the dot-com bubble burst. The amount of capital committed needs to return to levels when the VC industry generated competitive returns. So how much should the industry contract by?
“…we should expect it to fall by half to a $12 billion per year investing pace from it current $25 billion (and higher) rate.”
The thesis is similar to Fred Wilson’s Math Problem. I also believe that the VC industry will contract simply because many LPs will not have as much capital to invest. It will be interesting to see how quickly this right-sizing plays out. Unfortunately for entrepreneurs, obtaining capital from VCs will get more difficult as a result of right-sizing. Hopefully, other avenues (e.g. government grants, angel funds, friends and family, etc.) will be able to fill in some of the gap.