Tuesday, September 26, 2006

What's thy disposition, O' VC God!: Current Trends in Venture Capital

Disclaimer: I am a student, this is my opinion. If you know better, teach me. Leave a comment or ping me directly.

Understand the industry dynamics to find the job
Like those mythical dragons of China, jobs in Venture Capital seem to be exist but then maybe not. You see people getting hired but you are not sure how because no one knew, no one heard, and yet people are hired. Dragons probably don't exist but Venture Capital jobs do. And they exist in the realm of hearsay. You have to hear about them, they are not posted. Someone speaks, someone listens and in that wondrous journey of words through the ether, jobs are snatched, people are hired and history is made.
Ok, so the first paragraph was a whim of mine. To blend my somewhat childish literary tendencies into a professional blog. Now back to normalcy. Venture Capital positions are available but far and few. The trick is for someone to remember you when an opportunity arises. As discussed earlier, Networking is the key. But it's also important to understand the nature of this industry and where it is going.

State of the Industry
Simply put, there is far too much money in the industry and not that many great deals. The result is Overhang ( a nice, simple explanation of the problem is here courtesy Paul Kedrosky)and loads of good money chasing a few good deals. Most of the returns in the industry are made by the top few firms while the others scamper around for the scraps. That said, there are good VCs everywhere. However, this industry can be a vicious cycle. Past history is the only indicator of future performance. Far too many legends sit around on their past laurels while very capable people struggle to make a name for themselves. You have to be in a great firm to get a hold of the best deals (so that you can make a name for yourselves). You have get a hold of the best deals and display great aptitude in working on them, to get a shot at the best firms. And so the grand vicious circle of Venture Capital is created.

So since there is so much money floating around, there are a bunch of trends:

1. Move towards Emerging Markets - Countries like China and India are seeing a tremendous inflow of VC capital. A lot of firms are looking east to see if they can invest the money they have raised and make some profit. Whether they do so or not, is the topic of another posting. GigaOM has an excellent article on VC investing boom in India. Check it out.

2. Move towards Later Stage deals - Many VC firms are trying to invest in later stage, traditional Private Equity style deals. This, in the case of emerging markets, can be the low hanging fruit and might be a decent way of divesting larger bite sizes and getting the necessary returns. This means competing against hedge funds and PE shops, increased prices and lower returns.

3. Bigger is Better - There are few brand name funds being chased by a horde of LPs, and this is leading to huge amounts of capital in these select funds that are being raised. Small size funds are almost a misnomer. Look at this Quarter: Oak raised 2.56B fund, NEA raised 2.5B and Vantagepoint raised 0.9B (less than its target of 1B).

4. The incredible shrinking machine - Because of a combination of the factors above, the big will become bigger, the rich will become richer and the credible will become, well...more credible. A lot of small players will exit and the number of VC firms will decline dramatically (more so from the bottom).

So, the jobs will be fewer, people will be more selective about hiring you and most importantly:
you should be more selective about which firm you want to work for!

I will talk a lot more about this and each of the above trends in the coming posts.


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