|
 Earlier this week, I participated in a panel discussion for TechAmerica (fka the American Electronics Association) that covered topics around the current state of the venture capital industry and startups in general. At the end of the session, the moderator asked the quintessential question of the audience, "How many of you think there isn't enough startup capital in this town?" He followed with, "How many of you think there aren't enough quality startups in this town?"
Not surprisingly, the overwhelming majority of hands went up on the first question. Just a few brave souls (including yours truly) raised their hands on the second. As you might expect, there was general muttering about the latter, "Well, of course the VC would say that!"
So, where is the truth in all this? Certainly, conventional wisdom in almost any entrepreneurial setting is there isn't enough capital, or willing capital, or risk capital, or whatever. This is presumed true because "MY startup, which certainly deserves venture capital, didn't get any." On the flip side, the VCs in the room are saying to themselves, "Hey, I'd much rather drive than fly to board meetings, and we have lots of dry powder for new deals. If only these guys and gals understood how high the bar is to get VC dollars."
So, here is a more data-driven take on the answer, sure to light a fire under some of you to use the "comments" feature below. We know that the explosion of dollars into the venture capital asset class in the late 1990s led to very poor returns for venture funds since then. So, at a minimum we can state that the capital added into the system did not find good places to go multiply itself. Perhaps VCs are stupid or lazy (how's that for an opening) but more likely there just were not enough high quality, differentiable startups to take those dollars and make them grow.
But, you say, that might be true for the general economy, but in MY town it's different - we just don't get enough venture capital to meet the demand.
Recently, I was made aware of some fascinating research that sheds light on that assertion. Since it hasn't been published yet, all I can do is summarize the findings. The group looked at the results of venture investing by geography all across the US. They found that returns were not impacted by where the money was put to work. Let me repeat that a different way. A startup funded in Silicon Valley, or Seattle, or Portland, or East Boondocks was equally likely to provide attractive returns. Sure, there may be 2 orders of magnitude more deals done on Silicon Valley, but the odds of a home run are the same!
So, what this essentially says is that money will find the good deals, regardless of geography. In addition, it says that no geographical area is underfunded, because if it was, those areas would see better than average returns since there would be a supply/demand imbalance versus other parts of the country.
Now, there are certainly other reasons (job creation, etc.) why certain regions might want to get more venture dollars flowing.
But, for those of us running funds, operating as fiduciaries, the message is clear - from a supply and demand perspective by geography the system is in balance.
 |
