Recently a founding manager of one of the Leading VCs in Israelannounced he will not be part of the next round of funds, but will continue with his efforts in the existing funds. He mentions that the economic developments have made the time to exit longer than it used to be 10-12 years ago. That in time has made the investment in start-ups more problematic. The funds themselves are designed for 10-12 years duration, but the time for growing firms from small start-ups to companies that can be used for exit has lengthened and that made the VC try to capitalize either too early (less return on the investment) or invest in less risky firms.
In the second cycle, the institutional investors have moved towards investment in larger VCs due to managerial pressure – not related directly to risk management.
The investment in many small firms requires a managerial effort in tracking (board memberships and reports) many firms. If you want to keep the management load at a low enough level you would show a preference to a smaller number of investment of a larger size. That preference for larger VCs, is creating a push in the sector for larger VCs, - an artificial size advantage.
To sum, it would seem that the world economic crisis has created not only a reduction in available funds that has created a problem for the VCs. If that were the only problem it could have been remediated when the slow-down was over. The other effects such as the lengthened maturing process of Start-Ups, is more difficult to overcome and is creating a more complicated problem for the VC sector.
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