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You bring up an important point on new investment models. Earlier this week, in Washington State, I had a fascinating discussion on this with Rob Wiltbank from Willamette University. He is one of the world's top researchers in the area of entrepreneurship, angel and VC investment. Yesterday, Gary Yurkovich from Espresso Capital and I discussed the same thing.
We all agree completely with your prediction that new sources of financing will soon be available to fund the scenario you describe above. But we don't think it will come from traditional banks, but instead from new types of funds that will designed specifically to service this new need in the market. Both Rob and Gary are thinking about building a fund to do that.
10% feels about right to me and I agree that definitive data is frustrating difficult to find. Scott Shane, in his book "Fools’ Gold", says “Estimates using data from the "Entrepreneurship in the United States Assessment" indicate that the friends and family capital market is about $139 billion annually.” The best numbers I can find indicate that traditional VCs and angels each invest about $20 to 25 billion per year.
So the total seems to be somewhere in the $200 billion range, giving each of VCs and angels about 10% of the total. (I am still surprised by how big the Friends and Family component is.)
In the interest of keeping the debate going, I would like to respectively disagree with your point about using “longitudinal data – probably going back to the 1980s”. The VC industry has changed SO much since then. Back in the 1980s, the average VC principle was responsible for investing about $3 million – not per year, but total. Many of my angel friends manage portfolios bigger than that.
Back in the 1980s, the median VC investment in companies with M&A exits was around $5 million. Now it’s over $30 million.
Here are a couple of graphs to illustrate those metrics: http://www.angelblog.net/Venture_Capital_Firms_Ar...
The size of today’s traditional VC funds is the single biggest reason that the old VC model is so badly broken.
I like your term ‘visitors’ to describe a lot of the guys who built, and then failed to effectively manage, those huge VC funds created in the 1990s.
The economy desperately needs more early stage investors like you and Fred Wilson who will actually invest in start-ups. And more greybeard VCs like Alan Patricof who will say publicly that to produce a good return, today’s VC funds should be around $75 million in size. And of course, a lot more angel investors.
On the identity crisis, my comments may be more about my own ‘damage’. I co-founded a traditional VC fund in the early 2000s. About five years in, I realized that the ‘traditional VC model’ was broken - irreparably. It was painful to see all that work go into building something on a defective foundation. I don't want to identify with being a “VC” anymore because most people now associate that term with something that doesn’t work and needs to change.
I wish we could find a new term that followed in the size sequence of:
3.<new name for a right-sized fund that works beneficially with entrepreneurs and produces an outstanding return for its stakeholders>
Sure, I agree with your list of “good friends who happen to be VCs that also make investments in this range.” You and your friends are in a small minority of VCs. Most traditional VCs make VERY few startup and seed investments.
I have believed for a while now that you have an identity crisis. You call yourself a VC but you act and think like an angel investor. Yeah, I know you have written about your angel deals, but you still think of yourself primarily as a VC.
The data is that angels invest in about 27x more startup and seed deals than traditional VCs: http://www.angelblog.net/Angels_Finance_27_Times_...
You are absolutely correct that the data on the VC industry is bogus – dangerously so: http://www.angelblog.net/VC_Return_Numbers_Are_Bo...
Keep up the great blogging – it’s important.
There is a very easy way to determine if this factor is the reason you aren't getting funded. Yes, I said EASY. Find a mentor who really understands the investment process. Have them work you through your pitch before you present. It's also essential you have them at the presentation. Make sure they get a chance to hear the feedback from the investors. If they are good, they will be able to tell you with an 80% certainty, what the investors are really thinking. If they are REALLY good, they will be able to tell you how to fix it.