Capital Shakeout

Institutional investors put the squeeze on VCs. What does it mean for you?
Magazine Contributor
2 min read

This story appears in the January 2001 issue of . Subscribe »

If you believe the warning knells of those bearish on the venture capital market, that loud sucking noise you've been hearing is the sound of a deep pool of large institutional investor cash being drained dry.

An exaggeration, perhaps, but not entirely off the mark. While second quarter 2000 saw continuing record levels of VC investment, third-quarter numbers showed signs of leveling off, with VCs complaining that institutional investors have grown stingier. A survey from the National Venture Capital Association (NVCA) reports some VCs saying they've been investing in early-stage companies less aggressively since last April's sell-off that ravaged the tech sector.

The result? "Returns on the VC side, previously stratospheric, may settle down to realistic," says Miles Spencer, president of Norwalk, Connecticut-based media company MoneyHunt Properties. It's a dose of realism giving institutional investors used to 100 percent-plus returns pause for thought. With dozens of vanity firms, incubators, accelerators and virtual angels angling for cash, investors can afford to be selective-which could lead to a considerable shakeout.

But Darwinian natural selection among VC firms doesn't necessarily mean fewer institutional dollars. NVCA president Mark Heesen says some institutions have invested so much, they've reached their legally permissible limits. "But as they get money back from the venture funds, I'd be surprised if they didn't return it to the venture process," says Heesen. Meanwhile, as pension funds max out, corporations and individuals are picking up the slack. Heesen cites figures that say professional capital firms raised $30 billion in the first half of 2000, compared with $51 billion for all of 1999 and $27 billion in 1998 as proof that appetite remains strong.

Still, as more established funds raise record levels of cash, smaller funds are getting pinched, says Heesen, which could mean more time on the road for entrepreneurs pitching to investors. "But while it will take longer," he says, "most funds will reach their goals."

For now, anyway. A marked decline in VC investing would cut back on financing options. "And, as we say, one bidder makes a short auction," says Spencer. Valuations will have to come down. "Things will be more competitive," he says. "A return to realism, one might say."


C.J. Prince is a New York City writer who specializes in business topics and the executive editor of Chief Executive magazine.


Contact Sources

More from Entrepreneur

Are paying too much for business insurance? Do you have critical gaps in your coverage? Trust Entrepreneur to help you find out.
Get Your Quote Now

One-on-one online sessions with our experts can help you start a business, grow your business, build your brand, fundraise and more.
Book Your Session

Whether you are launching or growing a business, we have all the business tools you need to take your business to the next level, in one place.
Enroll Now

Latest on Entrepreneur

My Queue

There are no Videos in your queue.

Click on the Add to next to any video to save to your queue.

There are no Articles in your queue.

Click on the Add to next to any article to save to your queue.

There are no Podcasts in your queue.

Click on the Add to next to any podcast episode to save to your queue.

You're not following any authors.

Click the Follow button on any author page to keep up with the latest content from your favorite authors.

It Started As a Joke and Turned Into a Startup That Raised $1 Million in Funding