What’s really happening to venture capital industry?

August 25, 2009 | Matt Marshall | Comments | |

venture-capitalBill Gurley, a venture capitalist at Benchmark Capital, has written one of the clearest explanations yet about what is happening to the venture capital industry.

Bottom line: Don’t be surprised if the number of VC firms in the U.S. is cut in half. And don’t be surprised if the average Silicon Valley resident doesn’t notice.

The reason: The VC industry may well return to the size it was during the mid-1990s, and this will be healthy for the industry overall.

Gurley concludes:

We have seen over and over again how excess capital can lead to crowded emerging markets with as many as 5-6 VC backed competitors. Reducing this to 2-3 players will result in less cutthroat behavior and much healthier returns for all companies and entrepreneurs in the market. Additionally, at a stabilized market size of well over $15B a year, there should be plenty of capital to fund the next Microsoft, Ebay, or Google.

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Matt Marshall is editor and CEO of VentureBeat. Follow him on Twitter at @mmarshall, and follow VentureBeat on Twitter at @venturebeat.

  • These are the most significant "Venture Capital and Private Equity Activity" data in Spain, in the 2009 First Semester:

    - Volume of € 678 million invested in this period, 49% less than in 2008.
    - 365 operations (199 new and 157 extensions), 21% less than in 2008.
    - € 300 million fund-raising, 84% less than in 2008.
    - € 270 million in divestments at cost, 15% less than in 2008.

    Medicine and health (25%), consumer products (23%) and Energy and Natural Resources (11.5%) were the sectors that attracted increased investment.
  • Jasper
    I've heard this same argument for the past 7 years. What's different now?

    And why wouldn't Valley residents care. Me-too products or not, investment = jobs.
  • The venture capital industry will indeed shrink - permanently - in total dollars as well as number of VC firms that are active. However, as Ethernet pioneer Bob Metcalfe has said, smart entrepreneurs will sift through the technologies that have been funded during the bubble years and will assemble the next great company and technology.

    Also, venture capital firms have typically been staffed by two types of partners: technologists that came from industry and bankers that came from the MBA route. Look for the bankers to largely exit the business, since the value add will not be in large quantities of capital deployed, but rather the astute combination of technologies and management expertise.