The Incredible Shrinking VC Industry?

The golden goose of US innovation continues to get plucked. The NVCA released data which shows the industry is shrinking at an accelerating rate. This reflects the New Normal for venture capital, where capital efficiency is gaining share against traditional VC. Many large funds have moved into CleanTech, where the investments required are huge and long-term.

Curiously the WSJ looked at the similar data and had a rosy spin on it. Their estimate for 1H10 commitments to venture capital is $7.5B across 72 funds vs $6.6B across 68 funds a year earlier. Promising, but still half of 2008, when in the same period $14.2B was raised.

The WSJ data shows money flowing to early stage and multi-stage but shrinking from later stage funds – sucking the middle dry. This is consistent with anecdotal experience in the heart of venture capital, Silicon Valley, where the mid-sized funds are the most challenged, and many larger funds are raising smaller this time.

Possibly the way to square the two reports is to distinguish funds for US investment vs. funds for global investment. TechCrunch reports that the number of funds and overall capital are expected to continue to decline for traditional markets, but to expand for China, India and Brazil. Sequoia for example just closed a $1B early-stage China fund, which I believe would be excluded from the NVCA data (it counts based on location of fund, not of sponsoring firm) and yet skew the WSJ data upwards.

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About Duncan Davidson 228 Articles

Affiliation: NetService Ventures

Duncan is an advisor to NetService Ventures, where he focuses on digital media and the mobile Internet.

Previously he was at four start-ups: Xumii, a mobile social service based on a Social Addressbook; SkyPilot Networks, the performance leader of wireless mesh systems for last-mile access, where he was the founding CEO; Covad Communications (Amex: DVW, $9B market cap at the peak), the leading independent DSL access provider, where he was the founding Chairman; InterTrust Technologies ($9B market cap at the peak), the pioneer in digital rights management technologies, now owned by Sony and Philips, where he was SVP Business Development and the pitchman for the IPO.

Before these ventures, Duncan was a partner at Cambridge Venture Partners, an early-stage venture firm, and managing partner of Gemini McKenna, a joint venture between Regis McKenna's marketing firm and Gemini Consulting, the global management consulting arm of Cap Gemini.

He serves on the board or is an adviser to Aggregate Knowledge (content discovery), Livescribe (digital pen), AllVoices (citizen journalism), Xumii (mobile social addressbook), Verismo (Internet settop box), and Widevine (DRM for IPTV).

Visit: Duncan Davidson's Blogs

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