The incredible shrinking venture industry

Many venture capitalists like to think the industry’s decade-long bloodletting is coming to an end. Don’t be too quick to agree.

More pruning might be on the way, despite a consolidation that has done away with or created zombies out of as many as half of the 1,053 firms active at the height of the dot-com bubble.

It comes down to simple math. The industry continues to invest more than it takes in at a time when capital concentration is putting resources in the hands of a few mega firms.

Sure, distributions and returns are on the rise, as is the venture-backed IPO market. But negative sentiment remains high among LPs, and venture firms at the margin of the business are likely to face questions of survival when they go back for new money.

It is not a surprise that many in solid, prosperous firms sense a period of stability. The pace of investing has steadied at between $25 billion and $30 billion, and attractive portfolio exits are becoming more frequent. Startup innovation is exciting and disruptive.

“I feel we’re almost all the way through the cleansing, which should result in a very healthy venture ecosystem,” said Adam Marcus, a managing director at OpenView Venture Partners. “Generally it feels like were in a great, steady state.”

But here are the startling facts. The industry continues to downsize at a considerable pace. For instance, only 221 U.S. firms invested $4 million or more in new companies year to date through the first week of December. That’s down almost 39% from 2007, when 360 firms made that size investment.

Viewed from a deals perspective, that’s just 123 firms backing five or more new companies, off a quarter from 2004, when the number stood at 163.

These numbers come from an analysis of data from the MoneyTree Report, which is assembled by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters (publisher of peHUB and VCJ). The report looks at just U.S.-based companies and firms, and VCJ’s analysis doesn’t include corporate venture arms and most angels.

At the same time, the industry continues to bleed capital. In all but two of the past 15 years, GPs invested more than they raised, according to data from the NVCA and Thomson Reuters. This includes the first nine months of 2013 when venture firms raised $11.6 billion and invested $20.8 billion – a gap that widened from 2012.

And there are no signs of relief. GPs write checks for what they see as attractive investment opportunities, but LPs don’t. Through the first three quarters of 2013, venture fundraising was down 29% from 2012.

This story first appeared in Reuters Venture Capital Journal. Subscribers can read the entire original story here. To subscribe to VCJ, please email

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