A Self Fulfilling Prophecy
With venture capital returns dismal over the last year and some calling the model broken, there has been a lot of debate as to how to return to normalcy. There has been some innovation to help with short term liquidity issues but the big question is how to make venture capital an attractive asset class again. For one, LPs want smaller funds. Fred Wilson has talked about the oversupply of venture money as well. I am not convinced that the problem is too much money chasing too few ideas but rather I think its too much money chasing the same ideas. Like any money managers VCs move in herds, and as access to capital became easy over the last few years, they found themselves in a zero-profit condition. There are plenty of good ideas out there that need funding. To get the over-sized returns LPs have come to expect (though few have received, with VCs tracking the S&P over the last 10 years), VCs need to take on more risk lest they find themselves without investors who will leave for better risk-adjusted returns.
