Two different forces affecting the venture industry

In yesterday’s post VCs in the future of VC Pandodaily contrast the views of leading VC innovators Fred Wilson and Josh Kopelman that the ‘VC industry as we know it won’t exist in ten years’ with Menlo Ventures partner Mark Siegel’s view that the next few years look very promising. They explain the difference by pointing to the fact that Wilson and Kopelman’s comments are aimed at entrepreneurs whilst Siegel’s are aimed at entrepreneurs.

I think that may be part of the reason, but the differences are more down to the fact they are thinking about and looking at two different forces that are driving change in the venture industry. Wilson and Kopelman are interested in the way that increasing capital efficiency at startups is shifting balance of power between investors and entrepreneurs in favour of entrepreneurs whilst Siegel is saying that lots of VCs have gone out of business and we are now at a point in the asset cycle which is favourable for investors. (I wrote about the asset cycle back here back in 2011.)

This means that they are both right. All VCs will find things a bit easier over the next few years because they face less competition, but at the same time secular changes in capital requirements will continue to drive changes in the industry. Entering a comfortable part of the asset cycle is great, but cycles come and go, and smart investors like Kopelman and Wilson are focused on where they need to be for the long term. That said, I anticipate that the changes wrought by the asset cycle will be the more apparent over the next couple of years. The chart below shows graphically just how many VCs have come out of the market – note that the timeline starts with 2013 and works back.

 

 

active venture firms declining

(The Pando post and data are all from the US, but the situation here in Europe is similar.)

Time will tell how smart we are here at Forward, but we are also building our business for the long term by investing in ways to add value to our portfolio companies and the local startup community which go beyond the traditional venture model of providing strategic guidance and access to personal networks.