IS 2016 THE END OF THE VENTURE CAPITAL ROAD?

The new year is off to an auspicious start. The public equity markets continue their steep sell-off and oil hasn’t been this cheap in over a decade. While the US economy remains solid, concern is beginning to creep into venture capitalists’ psyche.

There are a number of stats from various sources that indicate venture capital has hit its apex and is now starting to cool off. The obvious implications being lower returns for VCs and an increased difficulty in securing funding for startups who will feel the brunt of the pain. Startups will be forced to go all Hunger Games on each other for smaller round sizes with the ones winning subjected to ever increasing pressure to produce results faster and faster.

I believe funds that rely on the traditional home run model will continue to remain under pressure for the next several years. Private market, unicorn valuations are not being substantiated in the public market. Venture investors are already preparing themselves to take substantial haircuts once their billion dollar babies meet the harsh light of day. This assumes a company makes it that far. IPOs are becoming less and less likely as a liquidity event.

The uncertainty gripping the market represents an opportunity for smaller VCs with a differentiated model to shine. Smaller VCs should transition to a model that allows them to benefit from lower entry valuations and less reliance on public exits. Plus a truly hands-on approach adds another leg to the stool.

The old venture model is starting to show its age. The road is still open, but the superhighway is starting to narrow into a one lane country road.