Fred Wilson on Why the Collapse of Venture Capital is Good | Hacker News Reader

Fred Wilson on Why the Collapse of Venture Capital is Good

technologyreview.com

42 pointsolalonde6 comments

I feel tricked by link-bait on this one. Fred Wilson makes no mention of the "collapse" of VC. He doesn't even come close to the concept.

Tl;dr of the article:

-many VCs are having trouble fundraising because of mediocre returns

-Fred thinks it's good that there is a lot of early stage funding (angels). It should create more entrepreneurs

-Some VC funding is too concentrated in megafunds. If that $ was spread across funds, then there would be more diversity of ideas and companies

-Will Kickstarter/crowdfunding replace VC? Too early to tell

Even more succinct tl;dr:

- It's a diversity problem. Too much money in the hands of white guys in suits.

"I don't think there's too much money sitting around. I think there's too much money in too few hands. So when six white guys in suits control two and a half billion dollars, that's not a good thing. Instead of being allocated just to one firm, it would be better if that two and a half billion dollars was allocated to 25 firms at $100 million each. It would lead to more diversity or people trying more things: data sciences, urban sciences, transportation, energy, materials science, and many others. "

Interesting to see a firm number quoted on the target returns:

> What is a mediocre return?

> Anything less than three times your money over a 10-year period.

Fwiw, that's equivalent to around 12% annualized.

You have to consider the risk/illiquidity that's taken on to achieve that return.

It's my understanding that VC works in a manner similar to PE, where investors are given their returns when the entire fund they invest in is run down. Each fund has a vintage, so if you invest in the 2006 fund you might get paid back 7 years from then in 2013, that's kind of a long time.

For a liquid asset class to compare to, equities have done something like 6-6.5% real historically.

Yeah, that makes sense. I wasn't meaning to imply skepticism, just that I don't recall having actually seen a go/no-go number explicitly spelled out elsewhere, that 12% p.a. is the rough threshold delineating whether VC is worth it as an asset class, taking into account the risk/liquidity/etc.

I suppose going forward it mainly depends on what you think will happen to the stock market. Will the next 20 years see the resumption of the WW2-through-1990s performance level, or will they look more like the past 20 years, with middling to flat returns? If the latter, VC might become attractive at even lower returns compared to anemic returns in "regular" equity, but if the former, then it may become less attractive compared to a more liquid and diversified stock portfolio.

For the level of risk that seems about right. Remember an investor allocating funds to VC dos not have a financial objective to blow the stock market out the water, it's to create a risk adjusted return that is not highly correlated to the market. Unfortunately most VCs are unable to accomplish this (though I have little doubt USV has had that problem).

Also, to really calculate the return you should consider the method which VC funds call and return capital. It's not as though they just take the full amount on day one and return the gains (or losses) at the end of year 10. They have several transactions throughout the life of each fund.

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