This article recently appeared on BusinessWeek. It’s not a new discussion, but one that is so true. It is actually more of a PR piece of First Round Capital and Josh Kopelman, but whatever. It’s true. The venture firms with super larger funds have gotten caught in this recession. Actually, even before the recession, the venture model didn’t make much sense. I think Kopelman is absolutely correct when he says,
Venture firms raise money from institutional investors and wealthy individuals in discrete funds. To give a fund’s investors a 20% annual return, the firm needs to triple the money raised within a six-year period, Kopelman said. For a $400 million fund, that means returning $1.2 billion to investors. Since VCs typically don’t want the risk of holding more than 20% of the companies they invest in, they have to help build a few companies with a total of $6 billion in market value. But in the past few years only a handful of companies have sold or gone public for more than $1 billion. ‘You sit there and say, ‘Holy crap, that model doesn’t work.’
This is why I am excited with smaller venture capital funds like those raised by Founders Fund, Union Square Ventures, or Spark Capital. They may not genearte the multi-hundred million dollar exits, but several exits at tens or $100-$200 millions could generate a healthy return for the investors.
By: Jonathan Lee