Venture capital website Xconomy recently interviewed Kate Mitchell and Rory O’Driscoll, both general partners at Scale Venture Partners, a Foster City, CA-based firm that focuses on helping startups through the middle stage of their growth, for their take on the wild swings in the venture capital industry.
Mitchell is also the incoming chairperson for the National Venture Capital Association, the main trade association representing the venture industry in Washington, D.C.
They both confirmed that the industry will struggle through a rough patch in the next 2-3 years as limited partners react to subpar investment returns by pulling money out of venture capital. It’s a painful and necessary shakeout for the industry, says Mitchell. There were too many venture capital firms chasing too few investors, and too many entrepreneurs competing in the same space.
The pull-back will be more noticeable outside of Silicon Valley and Boston, where the venture capital community is bigger and better able to withstand the shakeout. Other regions will find fundraising to be particularly challenging.
However, balancing this trend is the fact that many entrepreneurs are now more efficient in the way they use capital. They’re reserving more capital for later stages of actually scaling up their business.
The venture capital industry may have overshot the amount of investment the industry could reasonably absorb by a factor of ten, and is now swinging back drastically in the opposite direction. But this does not mean that the venture capital model is “broken” says O’Driscoll.
There’s still no hard evidence that any other form of capital allocation works as well to fund business innovation. Europe has a highly state-sponsored venture capital system, and entrepreneurship is even more challenging there, he says. Plus there are signs that China has lowered its capital gains tax rate to 10 percent and may lower it further, in an effort to essentially copy the proven U.S. venture capital model.
What are your thoughts? What could invigorate the struggling venture capital investment outside of major centers such as Silicon Valley and Boston? Add your comments below.
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