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Are VCs Divorced From Reality?

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The National Venture Capital Association today released predictions for the coming year that appear to embody the kind of cognitive dissonance one sees in a person with Stockholm Syndrome. The surveyed members of the NVCA agree that the number of funds in the venture industry will shrink in the next five years, the limited partners who invest will shift radically, and the amount each fund raises will decrease. That’s in line with what several people have shared with us during 2008 and 2009. But despite shrinking funds, VCs remain unusually optimistic about investment dollars and staffing levels.

Here are the scary numbers:

  • 87 percent believe that funds raised in 2010 will be on average smaller than previously.
  • 48 percent predict more foreign LPs investing in U.S. venture funds in the coming year.
  • 90 percent predict that the number of venture capital firms will decline over the next five years.
  • 72 percent believe the industry will contract between 1 percent and 30 percent.

And here’s where it gets weird. Given the shrinkage in the industry, one might expect a little more worry on the part of the general partners managing the funds. But 63 percent of those surveyed believe the number of investment professionals within their firms will stay the same, and 71 percent say there will be no change in staffing at the administrative level. It seems like only last year that VCs concerned about a shrinking economy told their portfolio companies to cut, and cut deep. Oh yeah, it WAS last year.

Even crazier, 63 percent of all respondents expect venture investment dollar levels to remain the same or increase from 2009 with 44 percent forecasting a level between $21 billion and $25 billion. Sure, 2009 investment so far is incredibly low at about $12.3 billion through the first three-quarters of the year, but with general partners and experts saying the industry needs to set a goal of investing about $13 billion, the 44 percent expecting $21-25 billion seem overly optimistic. That was about the amount invested in 2002, 2004 and 2005.

Perhaps the optimism in the face of less money comes from the fact that VCs believe initial public offerings and acquisitions will increase in the coming year. An overwhelming 91 percent believe acquisitions will increase, and 64 percent think the value of those mergers will rise.

For the industries that venture firms will favor in the coming year, check out the charts below. Venture capitalists may be unbelievably optimistic in the coming year, but they still have money to fling at good (and frankly, bad) ideas.

4 Responses to “Are VCs Divorced From Reality?”

  1. It’s human nature, just like how 80% of people think they’re better-than-average drivers. No one thinks — or wants to admit, even in a survey — that they’re the chaff.

    Also, the VC’s have all read these predictions already, even in blogs from their own ranks. So, it’s natural for them to answer how they think they’re supposed to, by just spouting the current conventional/popular wisdom.

    Remember, VC’s are people, too :)

  2. Since your blog post title is a rhetorical question, I’ll simply add that this doesn’t surprise me. I think your point about the increased expectations on IPO and acquisitions in 2010 are what’s behind the optimism, but the funds that still base IRR formulas on 10x returns and didn’t adapt their models are in for a rough ride.

  3. The real question is why this would surprise anyone?

    VCs have never been about reality; to the contrary, their lives and business models are about altering reality.

    Think about it: in general, they live in a world where one success out of ten tries is wildly successful. Where else does that kind of performance get you anything other than fired?

    Surveys and statistics notwithstanding, the VC community will continue to do its thing, and the rest of us will wish we owned 200-foot yachts.

    Jeff Yablon
    President & CEO
    Answer Guy and Virtual VIP Business Change Coaching

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