Smaller is Better in VC, really?

Another interesting article on the changes in the VC industry from the NY Times BITS blog. The people that are quoted here are all truly the elders in our industry - in my nmind, they speak the truth. How does that shake out for startups and related service providers? I think we all better get used to smaller...


http://bits.blogs.nytimes.com/2009/06/05/venture-capitals-elders-say-think-small/?scp=1&sq=venture%20capital%20think%20small&st=cse

June 5, 2009, 7:45 am —
Venture Capital’s Elders Say Think Small
By Claire Cain Miller

Venture capitalists who began investing in the 1960s have seen the industry transform any number of times. Their advice to today’s venture capital firms: think small.

In the good old days, venture funds were $100 million at most, recalled Alan Patricof, founder and general partner of Greycroft Partners, who backed America Online and Apple Computer.

“I personally believe and I think the evidence proves that the venture industry has gotten too big, the funds have gotten too big,” he said. In order to invest their enormous amounts of capital, venture capitalists end up choosing companies that are not sufficiently disciplined or capital-efficient, he said. And because firms have invested so much money, they depend on taking their portfolio companies public to get great enough returns, at a time when I.P.O.s are few and far between.

“Our biggest challenge today for venture capital is to think smaller,” said Mr. Patricof, who recently wrote an essay on NYTimes.com on how venture capital has changed.
In the 1960s, when venture capital was virtually unheard of, most investors were family offices and only tens of millions of dollars were invested in start-ups each year, recalled Franklin “Pitch” Johnson, who backed Amgen and Applied Biosystems. That grew to hundreds of millions of dollars in the 1970s, a few billion in the 1980s and $100 billion in the 1990s, when “we knew it wouldn’t go on,” he said.

Much of the huge influx of money in the 1990s came from pension funds, which saw the returns that endowments and foundations were getting from venture capital firms’ Internet deals and wanted in on the game.

Paul Denning, chief executive of Denning & Co., a private equity consulting and fundraising firm, remembers a time in the 1990s when he encouraged a venture capitalist to visit the big pension funds but the investor refused, saying he did not want their money. At the time, Mr. Denning thought he was misguided. “Maybe he was right,” he says now.

Investors in venture funds cut back after the Internet bubble burst and today venture capitalists invest about $30 billion a year, though that is still too much, Mr. Patricof said.
Not all of the venture capitalists who invested alongside him since the 1960s agree that smaller is better. Richard Kramlich, who invested with Arthur Rock before co-founding New Enterprise Associates in 1978, has one of the biggest funds in the industry, with $8.5 billion in committed capital.

His firm sometimes incubates tiny companies with small amounts of money, as it did with Data Domain, which went public last year. It also invests large amounts of money in later-stage companies that need to grow, as it recently did when it invested $45 million in Workday.
“On one hand, it’s great to experiment, and on the other hand, we have to have the capacity sometimes to do” big investments in companies with a lot of potential, he said.