Venture Capital Attrition

September 10, 2009

Summary: An online article by Bill Gurley, a venture capitalist at Benchmark Capital, discusses the state of the VC industry in the United States, with particular focus on the source of funds. Specifically, institutional investors (such as large hedge funds), invest a certain share of their capital into high risk and high reward illiquid alternative assets. In the last four years, this share grew drastically, though since 2008/9 it seems that this share is declining towards its previously low level. The article further gives details regarding the specific mechanisms through which the large institutional investors allocate their funds, and the operations through which they adjust their holdings. (READ MORE)

The Take Away: The decline in VC funds should not be particularly worrying for firms that require VC money, since the VC market was becoming very crowded, with multiple backers supporting sometimes unprofitable companies. A Smaller VC industry might be beneficial for technological progress and development.

Relevance: Data shows that foreign VC accounts for an important share of VC funds of Canadian firms. The questions arise of whether the Canadian VC market is as crowded as the American one, and whether or not asymmetric reductions in Canadian VC rather than US VC could damage Canadian industry.

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