David Dalka asked an interesting follow-up question to my post yesterday about the consolidation in the venture business. What does this consolidation mean to the business? A couple of things:
1) a lot of the firms out of the business now should not have been in it to begin with. They drove up prices and encouraged a loss of discipline in the entrepreneurial world. So, this segment going away is actually a positive to both entrepreneurs and VC’s. If they had helped back successful firms (versus the 10th loser in a space), their performance might have been good enough for the next fund.
2) I don’t think that there will be a massive impact on quality start-ups. As consolidation occurs, there is generally room for the smaller niche or focused funds. These often, due to size, focus earlier stage. As the brand funds get bigger, most will keep an early stage segment going but raise like DFJ and Sequoia, later stage funds in addition to their early stage ones. So, the sub-$100m funds will survive as will the brands. The $150-400m funds will take the hits in numbers most likely.
3) as long as the cycle continues, angels and strategics will do a lot of earlier investing. Should the stock market turn ugly, this money will dry up. This will have the biggest impact, I believe, in the seed/early stage world.
This all said, good ideas & teams will get funded but not necessarily at the higher valuations or larger rounds sizes of today. Running these companies will require more discipline which is a good thing and there won’t be as many competitors. First time entrepreneurs will take the brunt of any kind of pullback. This impacts the future since it is these first time efforts that lead to bigger second or third time successes.
So, this shake-up is a natural, and in the long run, healthy, correction. It prunes the herd. It won’t always be enjoyable for the VC’s or the entrepreneurial communities, but does result in a better environment. We will see if I am right on this…