2006 October 07 Saturday
Venture Capitalists Face Shortage Of Good Prospects

Venture capitalists have too much money for the number of prospective investments they can find.

“The traditional venture model seems to us to be broken,” Steve Dow, a general partner at Sevin Rosen Funds, said in an interview.

Sevin Rosen, a 25-year-old firm that is among the most respected in the industry, was in the process of closing its 10th fund and had received commitments from investors for $250 million to $300 million, Mr. Dow said. But in a letter sent to those investors yesterday, Sevin Rosen said it had decided to abort that process.

“We have decided to take the radical step of returning the commitments you have given us for Fund X,” the firm wrote.

Explaining its decision, Sevin Rosen, which has offices in Dallas and Silicon Valley, said that too much money had flooded the venture business and too many companies were being given financing in every conceivable sector.

What is bad news for the VCs is good news for the rest of us. Companies that have great ideas have an easier time getting money. More good business models get funded. We benefit from a larger and better selection of goods and services.

The article reports the firm also complains about a weak Initial Public Offering (IPO) market. Weak? I suspect the market has become more efficient. The Vulture Capitalists brought too many worthless turkeys to market back in the 1990s and now the prospective buyers know to look hard when VCs make extravagant claims about the future prospects of their investments.

To succeed in venture capitalism is going to require more technical and business talent when analysing prospective investments. I expect the efficiency of venture capitalists to improve as a result of the heigthened competition they face. That'll reduce waste. Seems like good news for the economy as a whole.

Share |      By Randall Parker at 2006 October 07 12:33 PM  Economics Venture Capital

Kurt said at October 8, 2006 3:42 PM:

In the old days (pre 1995), venture capitalists were mainly composed of people who were sucessdul entreprenuers in their own right who decided to start VC funds. I know this because I met with several of them in 1990-1991 about a start-up I was involved with. The problem is that the late 90's bubble made VC trendy such that all of the I-banking MBA parasites got into the game. These are the people who brought all of the worthless turkeys to I.P.O. during the 1998-2000 period. Then, came the inevitable crash and shakeout. Now the VC scene has likely returned to the pre-1995 normalcy, which is better for eveyone as far as I'm concerned.

Rob-ot said at October 10, 2006 4:23 AM:

The problem with MBAs in VC is that they like sales projections, and they like projections based on similar products. The best new things, not too much is similar. They can't make projections, so they don't buy.

Also, VC's like profitable, growing businesses. Once something is growing and proven, why sell most of your business for cheap?

Angel investing may be the way to go for outsize returns.

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