The VC crunch
Friday, October 3rd, 2008
Many VCs will run dry, which doesn’t bode well for companies needing more funding to reach profitability:
Before the market meltdown it might have been OK for a pension fund or university endowment to park money in an underperforming VC fund as a limited partner. But going forward, all bets are off.
Venture capital operates via commitments. A limited partner pledges a certain amount to a fund, and as the VC firm needs it, it makes capital calls to get that money to fund its portfolio companies. If you don’t pony up when asked, you typically lose all your prior investment and are frozen out going forward. After the dotcom crash, capital calls came from VC firms and some limited partners simply said no – whether it was because they were wiped out in the Internet implosion, or they didn’t want to throw good money after bad.
It could be worse this time around. “My expectation is that it will start first in some private equity funds, that there will be a substantial miss on a capital call, and we’ll see it next in venture capital,” says Paul Kedrosky, an investor and academic focused on the future of risk capital and writer of the business blog Infectious Greed. “No one is going to stiff Kleiner Perkins, but the second or third-tier guys will get stiffed all day long.”
Time for some of our idiot competitors, until now coasting on greed, OPM and an association with “The Blogs,” to shutter.