Traditional Venture Capital Broken?

Venture Capital Broken?

"You would think that cheap, abundant capital was a great boon for entrepreneurs. It isn't. The reality of startups is that you spend what you have. The more cash you have in your pocket, the less you value each dollar. It is human nature. Lots of cheap capital, available at high valuations seems great, until you do the exit math...Higher valuations and high venture rounds may feel good in the short term, but with IPOs as scarce as they are, they can price you out of the very exit you seek...

The traditional venture capital model has been “fund twenty, pray for two.” Since you could only lose 1X your money, you could make it up with a couple of big hits. But big hits are fewer and much farther between than ever before...The math worked when venture funds were $200M and exits were $500M. It doesn’t work when the numbers are reversed...

I can only see two venture capital strategies that make sense in this environment. One is to be small, focused, and totally aligned with market realities and founder incentives...be maniacal about capital efficiency...place small bets in multiple companies along an investment theme...Then even the small outcomes can provide a venture return...The other strategy is to be treat venture capital as one of many capital markets to search for inefficiencies across the private-public spectrum..."

Read more in this provocative post from EarlyStageVC.