So you want to be a VC, eh? (Part 3)

If you take but one thing away from these posts, let it be this:  venture capital is a tough business to get in, be in and stay in. During 2009, the VC industry continued the downsizing that became very visible in mid-2008.  While the global economic issues that surfaced in 2008 (e.g. banking meltdown, subprime market, global economic recession) accelerated the decline and definitely added stresses to the industry, this resizing is a function of the technology bubble bursting several years earlier – also known as the “dot com to dot gone” era.  With many firms that raised money during the bubble unable to raise new funds at this time, a further decline in the number of firms is likely.  While fund raising and investment entered a new range, IPO activity remained at a mere trickle and the acquisition exit marketplace declined both in quantity and quality.

A healthy venture capital ecosystem requires its metrics to be in balance.  And while the quality of new business opportunities, known as ‘deal flow’, remains very high quality and the best opportunities are getting funded, stresses remain.  The lack of distributions to the institutional investors who provide the capital to the industry has left these professional money managers with little capital to recycle back to the industry.  2009 remained a difficult year for many firms to raise money.

As we close out 2010, little has improved.  Exits and fund raising remain challenging but the venture capital industry is very much open for business.   And, as a positive note to some of the negative economic issues that are still lingering such as unemployment, people who being released from employment are no longer seeking new jobs; rather, they are forming excellent new teams and are coming to angel and venture firms with very strong business propositions.

Looking forward, there is a new competitive factor that industry veterans, both VCs and Angels, will contend with.  In the words of Michael Porter’s 5 Forces, they are referred to as “Potential Entrants”. Potential entrants into the investment space are new angel investors that were recently created as a result of some favorable IPO (e.g. Google) or secondary-market liquidation events (e.g. Facebook).  In addition, with impending exit events happening at other major tech companies like Zynga and Twitter, there will be a further influx of newly minted millionaires who too will begin investing within the next three to five years.  These are young, technical, and passionate individuals are looking for not only opportunities to invest in, but to also lend their own talents to the invested venture to increase its chances of success.  Finally, many of their investment opportunities may come from the fellow peers who would be more willing to take initial money from a friend or former colleague, acting as an angel, versus an established angel investor or venture capitalist.

We’ll wrap up the blog series hoping you have a clearer understanding of the VC industry and realize, that at the end of the day, it’s no different than any other business venture.  Every industry has it’s challenges and it’s up to the bold few to push forward to make things happen.  So, you still want to be a VC?

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