A writer for a finance publication just asked me for comment on the future of venture capital. He cited some negative trends: the poor performance of endowments that put money into VC funds, the freeze-up of the IPO market as an exit strategy, and a slowdown in innovation. Here's a slightly edited version of what I wrote back. This may all be familiar to entrepreneurs ad investors, but I feel like sharing my perspective broadly.
I think venture capital is presently in some difficulty, but for a different set of reasons.
1. I see shrinkage of endowments as a positive. VC funds had too much money to invest well, and that was causing problems. Now supply and demand are better balanced. Firms with long-term track records are not having trouble raising new funds.
2. Exit mechanisms will recover as the economy recovers, which it is doing. This is a temporary problem.
3. I don't think innovation in the Information Technology space is in a holding pattern at all. Major new platforms like the iPhone and Android are just getting started. Tablet computing is going to be a revolution in many fields, including education. The continued operation of Moore's law means adding wi-fi to devices is basically free which will bring us a step closer to ubiquitous computing. In Act II of virtual worlds like Second Life (I am an investor), the chasm will be crossed and enterprise will adopt in droves for collaboration.
What I do see is that many of the best new startups, including ones with world-shaking ambitions, don't need venture capital to get started. Seed rounds of $500-750K, funded by angel investors and small, specialized funds (which are basically grown-up angels) are getting first choice of the best entrepreneurs in consumer Internet opportunities.
Startups have gotten cheaper, require fewer people and less time to market because today's platforms offer so much more of an advanced starting point. Entrepreneurs can get access both to capital and expertise from angels and seed funders. There is a whole generation of successful entrepreneurs with capital who from the core investors in this new band.
Many of these companies (and this is the sector I am investing in, having done 10 deals this year) go on to raise Series A rounds from institutional VC firms, but some do not. They become self-funding or are acquired. Of the ones who do raise a Series A, there may be less upside compared with having gotten in at the beginning.
On the other hand, Enterprise IT startups and networking/communications which have longer ramps and higher capital requirements are still good candidates for partnering with institutional venture capital.
So all in all I think that the opportunity set is shifting and perhaps shrinking a little in IT for VC's.