Last week, an article in the Wall Street Journal prompted me to post a short piece on the decline in venture capital. Economist Susan Woodward sent me a helpful note outlining what she sees as the key reasons for this contraction:
The 2000 vintage year is going to be the worst year for venture capital ever. I believe it will be the first year when venture fails, overall, to return capital to investors. Vast sums of money poured in ($95 billion was invested in portfolio companies that year, versus an average of $25-30 billion per year 2002 and later), and the prices paid were high, and a lot of the stuff funded was dumb. In a fund’s 10 year life, nearly all of the good stuff has happened by year 6 or 7. Any company that has not become obviously valuable in that time is very unlikely to do anything good for investors. Investors know this too. Thus, pretty much all of the year 2000 funds look terrible by now. Their general partners see that investors are not going to fund another fund for them, so they are making other plans.
(Susan has had a ring-side seat for the rise and decline of venture capital. Based in Silicon Valley, she’s a Principal at Sand Hill Econometrics, where, among many other things, she has tracked the returns on venture investments.)
A fun parlor game is to try to remember — without using Google, Bing, or Cuil — some of the “dumb” venture deals from that era. My first two guesses were Pets.com (“Because pets can’t drive”) and Webvan, but both were already public by 2000.