Just as some sharks constantly lose teeth but also have a full mouth as new ones emerge to fill the gaps, so the venture capital (VC) industry has been quietly renewing itself since the dot.com bust with a host of people quietly leaving the industry even if consolidation affecting the number of firms has yet to happen.
Mark Heesen, president of the US trade body the National Venture Capital Association (NVCA), said while the number of independent VC firms was not falling as rapidly as many had feared, there was a "high" reduction in the number of people working at them as average fund sizes continued to shrink.
Heesen said it was hard to gauge the scale of the decrease in numbers of people as many of the job seekers were below partner level or quietly retired. But the turnover has a cost in lost training. Jeffrey Bussgang, general partner at VC firm Flybridge Capital Partners, said it took 10 years and $30m to train a VC professional.
And another senior partner at a VC said as fundraisings became more difficult and a number of firms failed to raise new funds or raised smaller vehicles there was less money to manage and firms were shrinking.
Investors in VC funds, the limited partners (LPs), have become increasingly sceptical after seeing returns turn negative, ie they lost money, over the past decade.
Consultancy firm Cambridge Associates and the NVCA said the 10-year return on venture investing was -4.2% at the end of the June, compared with 14.3% during the same period last year.
Marco Da Rin, associate professor in the Department of Finance at Tilburg University, said: "Venture capital is going through a deep crisis. While it is often supported by governments for its ability to create successful entrepreneurial companies, it struggles to attract a steady flow of private money."
But LPs are still willing to back newer firms with promise, such as Andressen Horowitz raising $650m in the summer for its second fund, as well as top-tier firms, such as NEA closing a $2.5bn VC fund at the start of the year.
Da Rin said that, in Europe, about a third of the VC firms active in 2004 had ceased to operate, but about a quarter of those currently active started operating in the past three years.
He said: "Venture capital is therefore a shrinking industry that is also experiencing substantial entry."
Trade paper Private Equity News said membership levels at trade bodies on both sides of the Atlantic had remained broadly static over the past two years.
The number of firms registered with the European Private Equity and Venture Capital Association has dropped just slightly from 1,297 in 2008 to 1,223 this year, according to the association, while the British Private Equity and Venture Capital Association has had almost the same number of firms join as withdraw membership since 2008 – 22 new members against 23 resignations. In the US, the NVCA increased membership from 1,648 in 2008 to 1,670 last year, including 10 corporate members.
Meanwhile, data provider Preqin said the volume of firms in existence globally had grown from 3,858 in 2008 to 4,270. The figures mark a slowdown in the industry’s growth through the boom era. In February this year, Private Equity News’s annual survey of financial sponsors found that 84% of firms expected consolidation, up from 79% last year.
And Heesen said: "I am more optimistic today than I have been as the numbers are on our side, the economy is coming back and impact of the [mid-term US] elections will be more about looking at spending over tax [increases]."
He was also optimistic that the increased number of companies in Securities and Exchange Commission registration for a flotation were coming from businesses that actually wanted to go public rather than signalling for a potential acquirer. He said there were also a record number of trade sales delivering strong returns and there would be a further increase in activity over the next five months.
However, until the exits pick up and start to lift fundraising, dealmaking has remained slow. VCs invested $7.8bn in 995 deals for companies based in the US, Europe, Canada, Israel, Mainland China and India, down from $7.9bn put into 1,025 deals during the same period last year, according to data provider Dow Jones VentureSource.