VCs can’t find the Goldilocks deals--everything is either too small or too big
VCs are managing large funds, which means they need to make decent sized investments, much larger than before. The trouble is that there isn’t the type of deal flow that can accommodate those large sized investments and provide decent sized returns.
Most VCs know the IT enterprise sector, chip design, networking, software applications. The largest investment area has traditionally been the IT enterprise sector, but with all the consolidation of recent years, the handful of large dominant IT vendors are formidable competition to startups. They have a large customer base and that customer base is very conservative and reluctant to buy from small private companies--unless they are partnered with a large IT vendor. This means the encumbent IT vendors have great control over valuation since the exit strategy these days is to sell the business to a larger player.
In chip design, with the fabless model, and with offshoring work, some of the chip design deals are too small for many VCs. And in networking and software apps, there is little room for manouvre in those markets. In security, there is way too much competition. And mobile and wireless markets are also overcrowded. So, where do the VCs invest?
There are many other sectors, but there are problems with most of them. VCs generally don’t like pharma because the capital investments are too high and drug development is too risky. Many life sciences investments are also capital intensive and they don't understand those markets. VCs don’t like consumer based businesses because brand building is difficult, extremely expensive and consumers are fickle.
So what’s left? I see a lot of companies being formed, deals being made where the startup capital costs can almost be covered by pooling credit cards. This is also the terrain where angel investors are very active, and where they bring many advantages compared with VC firms. In fact, there are VCs in many of the angel networks, betting their personal money on some of these deals.
And why not? I heard you still get paid generous management fees even if you don't invest the funds. I’d like a job like that. I'm sure I would be very good at it too. I can hack most business plans to pieces, (I've done it many, many times). I would come to work on time and be a team player, and I'd share insightful things. Anybody have any vacancies?!
I should point out that the VCs that I meet are a hard working bunch because they are a self-selected group. The VCs I meet are the ones that are out and about, talking up their investments, working their networks, scouting for deals. I don't know the other guys, but their LPs probably do.
