From the Editor: Time for a Diet –

Since the start of the year, seven venture funds have returned $3 billion, but no one has come out and said it was a mistake to raise so much money to begin with. They talk about how they needed to “resize” because the environment changed, as though the craziness of 1999 and 2000 was real or sustainable.

John Doerr was big enough to make a mea culpa about his role in gassing up the Internet bubble. I don’t see that happening with the over-capitalization of the venture industry. Instead of admitting that the VC business is best run as a cottage industry, venture capitalists are trying to convince themselves and their peers that their funding binge wasn’t altogether wrong. The real problem, they would have you believe, was that they didn’t have the fancy infrastructure in place to put the money to work properly. In other words, VC firms need to be run like formal institutions.

Wrong. All this talk about the virtues of institutionalization is just a way for the guys with the billion-dollar funds (or what were billion-dollar funds) to try to rationalize the colossal mistake they made when they went out and raised too much money.

I say this with all due respect to Crescendo Ventures’ David Spreng, who writes that VC firms need to grow out their “craft” business stage and become “professional” institutions (see Viewpoint). For the record, Crescendo is not a megafund.

Even LPs aren’t being vocal enough about the notion of institutionalization. That’s not surprising when you consider their wallets fed the industry to the point of obesity. One LP laments in this issue that if someone comes along and drops $150 billion into private equity it would wreak havoc (see Cover Story). Another says: “There’s probably $75 billion too much in there already.”

We’re already seeing the disastrous results of overcapitalization. It’s going to take a very long time for the industry to work through its $100 billion or more worth of dry powder. The answer isn’t bigger institutional firms handling large sums of money. The answer is less money. History has shown that small and midsize funds have outperformed large funds. When you have less money to spend you have to be frugal and make every cent count, just like a cost-conscious consumer. Why did VCs waste so much money on dot-com and optics deals? Because they could. It has nothing to do with instituting professional systems. It’s just common sense.

In next month’s issue you’re going to hear from the “The Old Guard,” the grizzled veterans who built this industry when the word venture capital didn’t exist. One thing they all agree on is that this business doesn’t scale.

Face it. It’s time to put the industry on a diet.

Lawrence Aragon