There is a lot of chatter, angst and bad data out there about the shrinking venture capital asset class. In particular, recent conversation has focused on the number of active venture firms and what folks are saying is a decline in the number of active venture capital firms.
The data, however, actually doesn’t indicate a decline in the number of active VC firms. Second, what generally goes unrecognized is the the growth in the number of what we will call hyperactive venture capital firms (described below)
Let’s start with a look at the number of active US venture capital and corporate venture firms (first graph below). Active VC investors are defined as those who make at least 4 investments per year. What the graph below shows you is a steady increase in the number of active VC firms from 2009 to 2012 with 2012 registering more than 450 active venture capital firms – 479 to be exact. And as we’re almost at the midpoint of 2013, it looks like this year is trending well. While a number of firms in 2013 have made 4 investments already, there are nearly 500 who’ve already done 2 deals so assuming most of them keep pace in the second half of the year, the number of active firms should hold steady or increase slightly in 2013.
Three factors are contributing to an increase in the number of active venture capital firms, notably:
- Funds of all sizes making earlier-stage seed investments (this drove the highest deal tally since the dot com days in Q1’13)
- The growth and perhaps oversupply of seed venture capital firms
- A modest uptick in the number of corporate venture capital groups (note: even if you strip out corporate venture groups, there is an increase in the number of “pure play” VCs)
But the more interesting trend is the growth in the number of hyperactive VCs which we define as firms who do 10 or more deals per year. When we look at pure play VC firms (not corporate VCs) who participate in 10 or more deals per year, we see growth since 2009 with 2012 climbing to 190 hyperactive VCs.
Of the hyperactive VCs, there are 78 firms that have made over 10 investments in every year between 2007 and 2012. More than half of those firms completed between 101 and 200 deals over the six year time frame from 2007 to 2012 while six firms participated in over 300 financing deals in the past six years.
It is ultimately highly improbable (or impossible to be more accurate) that the ecosystem can handle this many active and hyperactive VCs as there are just not that many high quality opportunities for this many firms. Of course, a “new model” for venture capital might be created that allows more firms to prosper. To that end, there are a handful of pioneer firms who are trying to do things differently. But overall, the VC model has resisted significant change of any kind for quite some time, and so there is no credible data-based argument to suggest a new, better model is likely to emerge any time soon.
And in the absence of a better model, the same shakeout that can be expected with Seed VC funds will likely be experienced across the entire VC asset class. If you believe venture returns are becoming more concentrated among a handful of firms, this means that the carnage among these active and hyperactive venture firms will eventually be severe. Ultimately, predicting who will emerge victorious in the coming melee is what will be most interesting and useful. More to come on that.
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