Dealing With Challenges in the VC Community

Brian Garrett, co-founder of CrossCut Ventures ( talks about the challenges in the Venture Capitalist community. This video will delineate difficulties entrepreneurs might face when seeking investors, and methods for overcoming them.

  1. Overabundance of capital within the industry
  2. Large funds lead to companies being over funded
  3. Market is saturated with angel & non-professional investors

Right now there are several problems in the VC industry. The first thing is there’s too much money in the system. So for the last 10 years are mostly the bubble end, the post-bubble era, there was a lot of money flowing in from institutional investors into numerous funds. And what that led to is overfunding markets with too many companies competing for a fine at amount of dollars. And that’s made it really difficult to generate great returns because you have reduced eventual outcomes. When there are more competitors acquire, you can go acquire the number 5 competitor for a lower dollar amount.

So not enough great deals leading to poor outcomes for the last 10 years, and that’s really affected the influx of capital because the new companies, the new funds that are trying to achieve that are faced with trying to solve the issue of poor returns for the last 10 years.

Second problem with the industry is that the funds are too large. The successful funds continue to raise larger and larger in funds and then they are forced because of a scarcity of time and partners to push more capital into deals than is probably necessary and that misalignment is causing a lot of issues in the industry because the average MNA value for a venture-backed deal is somewhere in the 30 to 40 million dollar range. And you have this companies that are racing rounds of 10 to 20 million dollars at high valuations which does not put them into a position to take the typical outcome. They have an investor group that thinks this is a $200,000,000 or it’s a failure for me. And the reality is that with no IPO market, there is very few of those opportunities out there. So the funds are too large. They are over capitalizing the companies, and it has created a real issue.

And then the third problem right now in the industry is that there is an abundance of Angel investors. And while this is great and it stimulates innovation the problems that many of these angels aren’t institutionalized in their thinking, and they are not doing it as a full-time job. And so when times are good and they have been for the last few years, being an angel is a great job. It’s fun. It’s fun to put money into deals, it’s fun to talk about the deals you’re in. But, when times get tough and there’s difficult cleanup work to do, those angels often run to the hills or you know, off to their private islands.

So it leads to a sort of a disconnect between the quality companies that raise traditional financing and the companies that probably didn’t deserved to be there in the first place. And so we have this gap now in the industry where there is too many companies and not enough money there left to fund them or money there left to overfund the opportunities. And I think this is going to play itself out the next few years, but it’s causing a lot of issues for smaller funds and good innovative business that don’t need to raise a large amount of capital to hit successful milestones and exits.

So, basically the industry is in transition and a lot of things will shake out over the next few years, but it’s been a factor of 10, 15, 20 years of sort of a funding cycle and a lemming philosophy and capital flowing in and out of an asset class that has led to the issues we see now in the venture industry.