Decline, fall of venture business: Fewer firms, fewer VCs, fewer deals

Updated June 9, 2009

Decline, fall of venture business: Fewer firms, fewer VCs, fewer deals

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By BILL WARNER, Special to LTW

Editor’s note: Bill Warner writes “The Angel Connection” which is a regular feature in WRAL Local Tech Wire. LTW asked consultant Bill Warner to share advice for entrepreneurs seeking angel investors and/or venture capital investment. He is chairman of the Triangle Accredited Capital Forum, an angel investor network with over 100 members throughout the Southeast.

RESEARCH TRIANGLE PARK, N.C. - The National Venture Capital Association just reported that the number of venture capital principles has declined by 15 percent since the end of 2007. These are the folks that do the due diligence on investment opportunities and make the investment decisions within venture capital firms.

The number of venture capital firms has dropped by 13 percent.

Take a look at the WSJ article that gives the full details.

More bad news comes from VentureSource, which is part of Dow Jones. It reported that the number of venture firms making at least one investment deal of some type in 2008 dipped to 848, 5.6 percent fewer than in 2007.

Massive Exodus

Some of the best of the best are heading out the door. Large firms like Sequoia Capital and Bessemer Venture Partners, along with smaller firms like Atlas Venture, Advanced Technology Ventures and VantagePoint Venture Partners, have lost partner level people.

This is all a natural outcome of the decline of the venture capital market, and is why we are seeing new business models emerging.

The Underlying Problem with Venture Capital

For most of its recent history, venture capital deals have been structured with the requirement for a big payout upon exit, based on an initial public offering (IPO) or acquisition. IPOs have nearly dried up to nothing and acquisitions have suffered a tremendous decline over the last year or more.

As a result, venture firms are left holding onto investments that have no viable way to achieve liquidity in order to pocket their returns.

On top of this, with the rapid economic downturn at the start of the Obama administration, the institutions that fund venture capital have had to back away from this asset class. These institutions have lost up to 40 percent of their value, with some recovery recently, but have been in the mode of selling off their venture investments. Some have even had to withdraw their capital commitments to some venture firms. This has also put the brakes on venture firms that need to raise more money.

The Dilemma for Venture Capital

If a venture firm has recently raised a fund, they may have a chance to get through this economic downturn, assuming it recovers sometime next year. To survive, many are simply protecting the best companies in their portfolios, and are making few if any new company investments.

If a venture firm is nearly out of money, they are going to have a heck of a time raising a new fund in this market, and are faced with simply going out of business.

An Unwanted Outcome

Despite what you read, this is not a natural evolution of the venture capital market.

This is a forced outcome as a result of the economic downturn that has now nearly destroyed the venture capital business. This all goes back to the fundamental causes of the bank failures that was driven by mismanagement, government meddling and oversight failures.

About the author: Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.