Banking and Capital Markets
February 19, 2013
The Great Venture Capital Contraction
The contraction in total venture capital investments is likely to continue this year, as institutional investors pay greater attention to smaller and more local funds.
By Udayan Gupta
In 1987 a group of the U.S.s most influential venture capitalists, including Warburg Pincus founder Lionel Pincus and Kleiner Perkins Caufield & Byers co-founder Tom Perkins, convened at the Hilton Chicago OHare Airport hotel. Their then-fledgling industry was coming off some spectacular results, fueled in large part by the successful venture-backed IPOs earlier that decade. With the industry having proven itself and the laws making it easier for institutions to invest in venture capital, pension funds and endowment managers were ready to pour money into venture funds.
For the OHare gathering there were several crucial questions. Was this a sustainable industry? Could it manage a new influx of capital that might be two to three times what it was currently managing? Were the investment returns scalable? And were there enough venture capitalists to manage the industrys expansion?
Though there were doubters, the capital providers prevailed and the money poured in. A quarter century later some of the same issues are perplexing the venture industry but this time against a very different backdrop. Now the questions revolve around how much the industry will need to contract before it becomes healthy again. ....