Is There Too Much Venture Capital?

Venture capital is going through a readjustment period.

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The National Venture Capital Association recently released its first-quarter 2009 analysis of venture investing. Not surprisingly, the number of venture investments was substantially lower than in recent years. 

In Q1, there were only 549 venture deals adding up to a bit over $3 billion in funding. This was the lowest number of Q1 deals since 1995. 

Many see reduced venture funding as a huge problem. But others believe that the industry investment rate of $25 billion to $30 billion per year over the past decade is way too high and that the venture capital industry needs to be restructured and to shrink.

Fred Wilson from Union Square Ventures suggests in his article "The Venture Capital Math Problem" that venture capital doesn't scale and that the industry has too much capital. He argues that to generate attractive returns, the U.S. VC industry can support only an investment rate of around $15 billion to $17 billion per year.

And last week, the Kauffman Foundation released "Right Sizing the U.S. Venture Capital Industry." This report suggests that $12 billion per year is the right investment rate for the U.S. VC industry. 

Since less than 1 percent of all start-ups get venture funding, the availability of venture capital is irrelevant for most entrepreneurs and small businesses.

But for companies and entrepreneurs looking for venture funding, these numbers are sobering and point to a difficult venture-funding environment for at least the next few years.

Steve King is a partner at Emergent Research, where he leads an ongoing research project to identify, analyze, and forecast the global trends and shifts affe cting small business. He blogs at smallbizlabs.com.

TAGS:
small business
venture capitalism
  • Steve King

    Steve King is a Republican representative from Iowa.

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