That new era of Venture Capital is here

A couple of years ago I posted about what I thought would be the “new era of Venture Capital.” Specifically I was predicting that we’d see a strong barbell effect in VC fundraising. From that post:

I believe what we’re going to see in the venture industry is a bifurcation of fundraising– basically a barbell on the graph of fund sizes. Large, well known, multi-sector and multi-stage “mega-funds” will be able to raise $750MM or greater at one end of the scale, and smaller, more focused funds will raise $250MM or less on the other end – with a relatively small number of funds in the middle. [note: not sure what the problem is with the graphic from the original post, but I do know that it’s not rendering correctly)

Today the NVCA and Thomson Reuters released the Q4 and Year End 2012 fundraising statistics and they show this barbell in full effect. Mark Heesen of the NVCA put up a post on the NVCA blog that describes this:

Venture capital fundraising activity is being driven at two ends of the spectrum:  Large funds – over $700 million – are being raised and deployed by well established firms who are stage agnostic (seed to growth equity), nationally and internationally driven, and have the exit track record to attract limited partners. … At the other end of the spectrum are the smaller industry or geographically focused funds that are largely looking at seed and early stage investments.

Overall we’ve seen somewhat of a rightsizing of the venture industry with a smaller number of firms raising money and fewer firms actively investing – a trend that has been long anticipated but that we’ve only really been seeing in earnest in the last few years. Of course with a large number of small, seed focused funds out there, the chances of getting “stuck” at Series A or B without a good funding option goes up (this is the so-called Series A crunch that we’ve been hearing about of late). That said, I’m a capitalist at heart (and by title) and believe that ultimately the market sorts these sorts of things out (coming your way in 2014: the Series A roll-up fund!).

  • This “muddled-middle” situation is not good obviously for entrepreneurs.

    Why do you think some (smarter?) VCs follow through from the inside and most others don’t? Are these others just waiting to follow?

    • Different models/mentalities. It’s a bit “old school” to always want a new lead to price and validate every round but many VCs live in that world and have for a while. A minority (but a vocal one) will follow through. But also keep in mind that fund size effects this dynamic. A $50M fund has less of an ability to continue to support a business it seeded alone, while a larger fund (such as Foundry) has more leeway here. That’s just math and something entrepreneurs should keep in mind (and discuss explicitly with their seed funders) before taking capital. I should note that the reverse can also be true, when really large funds have seed programs. While smaller funds have an expectation of helping entrepreneurs be successful at the seed level, some of the larger fund programs can be more “spray and pray” and the expectation from the fund is that they will only support a portion of their seed investments with follow-on investment (despite the fact that their fund size would allow them more capital leeway). Also worth understanding well before taking that first round….

      • Wow. Thanks for the detailed response. That makes a lot of sense.

        So, a good funding strategy would be to diversify the roster of investors to cover that spectrum a bit?

        • But be careful of the “party round” where a bunch of people invest but no one takes responsibility (you want a true “lead”).

  • I have a hunch that this pattern is a fractal of sorts. That is what ever industry you look at you end up at equilibrium with a barbell shape (Beta Distribution). Why? M&A. Exits. And those that dont survive wither in the valley of death.

    Ill look it up if your interested.

    Do you have Series A numbers? average deal size, total deals, firm size, burn rate?

    Is 10k a month per employee a good number to work with with ?

    What does barbell say about crowdfunding risks?

    • I’d love to see the data. $10k is a good estimate in the early stage. This Cooley report has some good data that’s worth checking out re: financing trends (this is the 3Q12 report – the most recent one out).

      I think the biggest problem with Crowdfunding is going to be that by its nature it creates a syndicate that lacks a lead investor. That may work in some situations where the company only needs one round of funding, but for companies that do I think the Series A “cliff” will be more pronounced (in part because companies that go the crowdfunding route presumably do so if they lack other avenues of financing).