VCs with too much money

On HBS Working Knowledge:

It might be hard for the ordinary business owner or consumer to imagine having "too much" money. But that's exactly where the venture capital industry finds itself: with too much money available for the number of emerging enterprises able to offer the promise of an excellent return.

HBS professor William A. Sahlman noted: "One of the historical factors in the venture capital industry… was too much money going into too many deals in the same industry, so it was very hard for any individual companies to succeed, and valuations got pushed up…I wonder if you think that phenomenon has gone away?"

Marc A. Friend, a GP with Summit Partners, said the reason you see "five of everything starting at the same time" in the early stages is because smart people are looking at the same data. "You've got big companies that are addressing wide markets and there are gaps in the product portfolio," he said. Engineers and product developers leave those companies to start their own businesses to fill in those gaps. And they're rarely alone."

Friend said most of Summit's funds that were ten years old or older were in the top quartile, and he said he believed the 1999 fund he's involved with would likely occupy a similar spot when exits were made and the returns counted. "But that means single-digit (internal rate of return)," he said.

Eeks.

Reflecting on the last fifteen years in venture capital, Intel's McCall observed, "It's been a pretty wild ride." He recalled making twenty-five to thirty deals a year in the mid-1990s, a pace that accelerated to $1 billion a year in 1999 and 2000. Like many of those who invested in emerging high tech companies just before the bursting of the Internet bubble, Intel Capital still has some regrets from those heady days.

"I think back on the 2000 investments and wish we had not done a lot of that," McCall said. "We're still getting a few exits out of that right now, but smaller exits for the most part."

It's nice to see VCs that admit they're human just like the rest of us! :-)

Link: The VC Quandary: Too Much Money