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Why VCs Should Take Their Own Advice

The way venture capital firms are structured makes it almost impossible for outsiders to see what’s really going on inside those 1970s lodge-like Sand Hill Road offices. A firm is nothing more than a collection of partnerships around certain funds that run for ten years or more. So if a partner gets fired? Well, he or she is still technically a partner in an earlier fund, so firms don’t really have to talk about it if it isn’t in their best interest. And if a firm was one of many that couldn’t raise a new fund last year, who needs to know they were even trying? Unlike a startup, any firm that’s been around for a cycle or longer still has enough money under management from previous funds to keep the lights on. If they failed to raise a fund in 2009, they can always try again in 2010. It could take decades for even the worst firms to “go out of business.” Like generals, bad VCs don’t die, they just fade away. It’s an industry perfectly structured for sweeping problems under the rug, and as its fundamentals have declined over the last decade, that’s just what it’s been doing. But those big, lumpy problems are getting harder and harder to hide. Aside from rumors, it’s hard to know exactly who couldn’t raise a new fund in 2009, but we know the numbers were down precipitously . And slow economic recovery aside, it’s not going to get easier in 2010. Limited partners, the institutions that invest in venture funds, are finally accepting what almost every VC I know has been saying for a decade: There’s too much money in the industry and it’s killing the kind of early stage investing the asset class was founded on. And that's killing returns. But just as we’re finally starting to see limited partners make the hard decisions to throttle back investments in private equity, so too are some VCs grappling with their own hard decision: Stick with a broken asset class and try to fix it or just leave and start anew.
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