The future availability of venture capital may be dimming somewhat. First, as I wrote in my last post, Congress is considering potential legislation that will almost undoubtedly reduce the pool of angel investors, according to some estimates by as much as 75%. Without early cash infusion, many new companies won’t survive long enough to reach the stage where they would traditionally pursue venture capital — at least not without some serious, long-term bootstrapping.
Beyond this is an equally troubling development, at least from the perspective of the entrepreneurs: a potential consolidation of the venture capital industry looms. Several industry observers believe venture funds cannot achieve returns on investment at a high enough level to attract institutional investors if the amount of investment industry-wide exceeds $15 billion annually. In 2009, with investment down a whopping 30% from the previous year, the amount invested exceeded $21 billion. That’s an amazing six billion dollars over the amount that many believe is the “sweet spot” for the industry. Indeed, while venture funds invested $21 billion in 2009, they raised only $12 billion. One has to wonder if the consolidation is already under way.
What might this mean to your fledgling business? First, as always, those adept at stretching their invested capital will increase the odds of success considerably. Spendthrifts wilt. (Fred Wilson has a must-read perspective.) Second, don’t wait to raise capital until the need becomes urgent. The amount of time it takes to find investors is likely to increase. Third, get started now. The trend doesn’t favor those who wait.