Scott Stanford, co-founder and partner at ACME Capital, an early-stage VC firm, predicts a significant contraction in the venture capital industry. According to Stanford, half of the VC firms that were actively investing in the last decade will be sidelined and eventually collapse. The first wave of this contraction is expected to occur in the next five years, with the full impact evident in a decade.
The venture capital industry has seen a massive increase in the number of firms and the amount of capital they manage. By 1990, there were 300 VC firms overseeing $17 billion in assets. Now, there are 3,000 VC firms managing $1.2 trillion. However, the increase in exits has been modest at best. By 1990, VC-backed IPOs totaled $12.7 billion. By 2021, that increased to $60.1 billion. The proliferation of firms and the money they’re managing is not supported by the financial value they’re creating.
Stanford and ACME co-founder Hany Nada believes that the venture capital industry got ahead of itself, leading to an overcrowded, overcapitalized, and overvalued market. They argue that the creation of funds and the deployment of capital were driven by euphoric momentum investors, not technologists, who were blind to the nuances and challenges of timing innovation cycles.
The venture capital industry’s future will also be influenced by other factors. With higher interest rates, limited partners (LPs), or investors who put money into venture firms, have other options. Low-risk investments like investing in Treasury bonds are commanding a decent return. This could lead to a scarcity of capital, making current measures of GDP and the economy less relevant. However, goods and services should be in great abundance. The key question is what the right measures and the right questions are in this new landscape.
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