Shrinkage—Expanded Upon….


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10-year aggregated VC return, according to Cambridge Associates, was -4.6 percent (the 1, 3, 5 and 15 year returns were 8.5 percent, -2.1 percent, 4.3 percent, and 36.9 percent, respectively). Of course LP’s do not and can not invest in a VC index—they get to carefully select specific VC managers—but the message that the VC industry is now structurally challenged and/or unattractive took hold with many large institutional LP’s this past year.

Some other interesting implications and insights when one stares hard at the data…

Average Fund Size: Since 2000 the average VC fund raised was between $130 – $150 million, even throughout the “billion dollar fund” craze. In 2010 the average fund size was $80 million—an incredible decline—which may reflect the “micro VC” or “Super Angel” phenomenon or it may preview that a structural shift is upon us.

Average Deal Size: The average deal size has interestingly remained consistently between $6.25 and $7.5 million over the last five years or so. In 2000 it was $12.4 million, which clearly reflected all the capital that flooded into the VC marketplace ($107 billion was raised that year and just under $100 billion was invested). My guess is we should expect to see average deal size drop significantly over the next 18 months.

Total Number of Deals: In 2008 there were 4,025 deals—in 2009 there were 2,927. Interestingly there were 3,277 deals in 2010 which reflected the activity of the “Super Angel” as well as the profound waves of exciting innovation across all sectors including cloud computing, cleantech, consumer internet, personalized health, etc. My guess is the pace will remain around 3,000 new deals—maybe down slightly—per year in the near to medium term; deals will just be smaller on average.

This is not just a VC problem—entrepreneurs will have fewer sources of capital to access, there will be fewer cool companies offering great jobs, and new medicines/games/applications/devices will not be created. As we collectively witness this recalibration, maybe it is time to get out of the cold water and stop shrinking.

What do you think?

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Michael Greeley is a General Partner at Flare Capital Partners, a healthcare technology venture firm. Follow @greels1

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