Wednesday, January 12, 2011

Ramen Profitable VCs

Dow Jones reported today that venture capital fund raising at 7-year low. Some people smell VC shakeout and doom, and I call that B.S.

Yes, being in venture capital sucks compared to the good ol' 2004-2007 when the fund size was outrageously oversized. Before 2008, it really was a good life. 10 partners get together, go out to raise a billion dollars, and earn 2-3% management fee. (If you do a simple calculation, this comes out to be a lot of $$) When they hit 1-2 homeruns, they go out again.

It's no secret that the recession beginning in 2008 changed the dynamics of entrepreneurial community. VCs can't raise bigger funds, downsized partnership, and hate the fact that startups require less capital to make pretty awesome outcome. Wait, what? Some people don't like the fact that it's cheaper to run startups? Well, they're not making as big of living as before by making the same # of investments and get underwhelming management fee now.

Look. LPs lost a ton of money during the recession left and right from both public and private equity investment. They hated private equity but weren't able to unload this long-term assets. When PE/VC managers come back in 2008-2009, they said, "Look, things will be better. I want to keep this relationship. Instead of cutting you out for this fund, let me scale back". Money managers nodded, though not so excited about this.

VCs raised smaller funds and can no longer make big investments. Heck, startups are becoming cheaper to run, so why should investors make big investments? Coupled with the rise of super-angels and micro-VCs, the venture investor community go small. After all, startups don't require that much capital anyways. This is a healthy situation. Life is good again.

Many evidences point to the fact that VC shakeout hasn't really happened. Instead of shutting down, they scaled back. They became smaller. Yes, venture fund raising is at rock bottom in terms of capital raised, but there are as many investors and ever more startups making the startup economy engine going. Maybe we'll see ramen profitable VCs?