National Venture Capital Association, we have spoken about how the venture capital industry struggled in 2009. Though things appear to be returning to normal, 2009 was still a tough year for both VC investments and fund raising. Investor Seth Levine offered his opinion Monday on where he thinks the industry is headed and raised some interesting points on how VC firms will be funded in the future - an issue which could impact the way startups get funding.Over the last few months, as data has been released by the
Interestingly enough, according to VentureSource, VCs have been investing more than they have been raising themselves - $14 billion more over the last five years, to be exact. The strange thing is that $9 billion of that difference came in 2009 alone when VCs invested $21 billion but only raised $12 billion for themselves. This is a steep decline from the previous four years which saw fundraising and investment hover around $25 billion.
Levine believes that because of the drop in fund raising, VCs will begin settling into a lower level of investment. "Somewhere around $15Bn is the right 'steady state' investment pace for the venture industry as an asset class. At this investment level the return profile of the industry maps to a reasonable expectation of inputs and outputs (the money invested in start-ups as compared to the exit activity)," writes Levine.
Additionally, he believes that VC fundraising is headed towards an inverted bell-curve distribution where the majority of the money goes to the "outliers" of the industry. Larger funds with diverse portfolios will continue to attain large funds (like the $750 million we saw go to Battery Ventures earlier this month), while smaller funds which place higher investments in fewer companies will also grab a majority of the VC funds. It's that middle group of funds that will likely suffer, he says.
So what does this mean for startups looking for funding? Unfortunately, if this trend continues, lower VC funds means fewer investments, so the pool of money available to startups is shrinking. However, if Levine's idea of the inverted bell-curve holds true, then that means more money will be pumped into the smaller venture funds that provide many early-stage investments. In other words, it could become significantly easier to snag seed funding, but much more difficult to raise those subsequent rounds of funding later on down the road.
This, of course, all hinges on Levine's subscription to the idea of the $15 billion "steady state" (an idea he attributes to investor Fred Wilson) that he thinks the industry is headed to. But if early indicators of 2010 activity show anything, VC investments could be making a rebound from 2009 instead of heading for the "safe zone". It will be interesting to watch the numbers to see which way this scenario plays out, but it seems that either way, seed investments should stay steady or go up in 2010.