VCs experiencing "fund inflation"
It appears to be happening all over again: VC firms are growing. There's good news, and bad news, depending on how you look at it.
Back in 1999 and 2000, Silicon Valley's small venture capital firms experienced an uncontrolled growth-spurt. Firms that had previously raised funds of about $400 million in the mid-1990s were raising funds in 2000 of about $1 billion. Then, after the Internet bubble burst, they scrambled to reduced the size of their funds. Successful, trend-setting firms like Kleiner Perkins Caufield & Byers, and Sequoia Capital raised funds of about $400 million in 2003 and 2004. The reduction appeared to restore some financial sanity to Silicon Valley.
But with big investors continuing to push money to VCs, they're beginning to raise big funds again. We reported recently about InterWest raising a $600 million fund, the biggest so far this year. And now, there's word that U.S. Venture Partners is also aiming for $600 million (Word comes from VentureWire Professional, a subscription newsletter that we can't link to).
So, there's upward creep again.
Of course, this is good news for start-ups that want to raise money. They'll be in the driver's seat again, since VCs will be desparate to funnel their money somewhere. The downside is that no one has figured out whether there are really enough good companies to fund. Investing in too many start-ups could, in fact, mean that there's too much competition among too many shoddy companies. Twenty social networking companies, for example, could be eating away at each other's bottom line, meaning none of them can survive. Returns then are reduced for VCs, and so on. The jury is still out on which direction this will head. In the end, though, the weaker performing VCs may lose quite a bit of money.