If you’re a U.S.-based general partner, this month’s cover story is welcome relief. If you’re a U.S.-based limited partner, well, at least you were in a position of power for a little while.
The dramatic reduction in fund sizes plus the influx of capital from non-U.S. institutions is going to create a lot of competition that can only benefit GPs. Certainly the better venture funds will be many times oversubscribed, as we saw with Sequoia Capital XI. But the “B” players are also going to see a big wave of potential new LPs. And the market will be receptive to first-time funds being raised by GPs with strong track records, like the folks at Thomas, McNerney & Partners.
LPs know that the funds raised in the next few years will largely be winners, because they will be investing in a down cycle at much lower valuations. Yes, returns for funds raised in the bubble are taking a hit, but the smart money knows that this is an asset class you abandon at your own peril. As Jesse Reyes, VP of Venture Economics, says in his performance analysis piece, venture returns have kicked the rear of the S&P 500 when compounded annually over the past 20 years.
Dumb and Hummer
On a different topic, I completely disagree with those who claim that the recent suit against Hummer Winblad Venture Partners over Napster will stifle investments in cutting-edge companies. The only VC at risk here is Hummer, and it has no one to blame but itself. First, it knowingly invested in a company that was being sued by the record industry. Then it installed one of its partners as the CEO of the controversial company. I find it hard to believe that the partners didn’t realize that investing in Napster put them at risk of getting sued. I’m not saying that the record industry is right to take the firm to court. I’m simply saying that this is a unique situation, one that shouldn’t worry venture capitalists who don’t make a habit of investing in companies that are being sued by large industries.