Venture Capital Is *Really* Broken

A few weeks ago I wrote about how venture capital was broken.  Then Adeo published his presentation with a lot more detail which kicked off a storm of “yes it is” and “no it isn’t” blog posts.

Well, if there were any doubts, this article from Monday should put things to rest.

The short version is this:

  • LPs (or “limited partners,” i.e. the investors in venture funds) are, like everyone else, down 40% for the year on public equities.
  • The LPs investments in venture funds have yet to be marked down (they’re also down 40%, but accounting rules don’t allow them to show that yet).
  • LPs have firm mandates on how much they can invest in “alternative investments” (the category that includes hedge funds, private equity, etc.).  These limits are typically a percentage of the fund, say 5%.
  • Well, that 5% allocation is now almost 10% because of the aforementioned issues so now not only to LPs not have any more cash for VC capital calls, they need to get rid of some of their existing investments.
  • Bloomberg reports that over $100 billion (yes billion) of private equity will be sold on the secondary market and that it’s selling for 50 cents on the dollar.

I’m not entirely sure what this huge growth in the secondary market means for GPs, but it can’t be good.  My bet is that there’s going to be a huge shake-out in VC.  No money from LPs means no money for VCs means no money for startups.  Some entrepreneurs are going to take pleasure watching VCs blow up and go away but truth is this will have a huge negative impact on startups who will see much, much less capital available to them.  As much as it pains me to say it, we entrepreneurs need to wish the VCs well.