VC Headed For Severe Contraction Or Is It Clickbait?
A recent article from BusinessInsider predicts a large scale extinction event among VCs in the next 5-10 years --- I know, I know, hardly a "hot take". Frankly, I do think it's coming even if interest rates drop again and money becomes easier. The math looks like:
* In 1991 there were 300 VC firms managing $17B. This number has increased 70x to $1.2T under management with 10x more VC firms. Unfortunately, IPO exits have only increased 5x from $12B to $60B.
Which means the vast majority of exits, if there are any, are acquisitions. In fact, it's essentially the default outcome. Most founders believe that is a good thing, but unless you don't need the acquirer, it's often not because the acquiring company can dictate your terms including the value of all the shares you think you have.
Pitchbook predicts many VCs will fail to raise their next round. It's almost as if carried interest has become the new VC lifestyle rather than risk/reward.
It's not just VC, even private equity is seeing fewer exits.
Separately, at the lower end there is still a group chasing the investor lifestyle. It's almost a meme out there if you are watching closely enough >>
- I started a D2C brand... which, you know... early on was great when big companies were scared, but that ride stopped.
- So I became an angel investor, still waiting for the returns.
- While doing that... I found a lot of "great" D2C brands that just needed a new home, so I became a holdco.
- D2C holdcos are tough because of profitability and revenue, so I switched to a SaaS holdco.
- Currently learning that most SaaS is not profitable either.
-> VC must contract, it's already reverting to the mean.
-> LPs will not stay dumb money forever. Diversification into bad assets become "di-worseification".
Cash is king, and controlling your destiny is critical. Even if you have 2+ years of runway, you are not safe. SaaS business models take 2 years to react to business and pricing changes, I have seen it up close and personal. And then if you make a wrong move, it takes even longer to adjust. (for instance if you drop your prices to reduce your churn rate of bad businesses instead of raising them on better customers).
Ultimately if you are signing up the wrong types of customers, it affects your entire business. You are who you serve, and signing up the wrong customer can be shrugged off as a retention reason of "not our fault" but the cost of lost focus and every employee touching that customer 100 times in the past 2 years is already out the door.
