Is now the ideal time for LPs to be allocating to VC?

We often hear the refrain that venture capital investing in cleantech has plummeted over the past couple years, interpreting that statement as a comment on the viability of cleantech companies to make a profit and exit. That’s not the entire story as the success of Tesla, SolarCity and Nest have proven. Rather, venture capital as a whole is in a very bad place with the asset class spoken of negatively by limited partners. In fact, CalPERS, the second biggest public pension fund in the U.S. committed to just four private equity/venture capital funds in 2013.

So with institutional commitments to VC so low, is there an opportunity now? Maia Heymann, a 20 year VC veteran currently at CommonAngels Ventures, lays out a compelling argument that given the major contraction in venture capital, now is a golden opportunity to move money into the asset class. He notes that in 2013 $29.4 billion was invested in new companies from VCs but only $16.9 billion was raised by new VC funds, creating a picture where capital continues to flow out of the VC system. He blames overcapitalization in the early 2000s (for point of reference, a whopping $100 billion was committed to VC in the year 2000, 3 times what had been committed only 3 years prior).

All that money has to work its way through the system over years and as the financial crises hit, suddenly a lot of cash was stuck in investments with no exit or which were getting hammered in public markets. Heymann believes we’re enter a period where “a once over-capitalized class is finally right-sizing,” which he views as an opportunity. I’d add that with less capital in the system, VCs will be able to be pickier about which startups they fund and are likely to wind up getting better equity stakes in those startups since as many reports and startups have noted early stage capital is hard to come by right now.

VC is tricky because we won’t know for another 7-10 years how the brave folks who put money into VC today, when it was struggling most, have done. But if you still believe that lots of venture funded startups can be profitable and competitive, and that there’s still room to run in the technological transformation of the economy, then getting money into VC now has some potential advantages.

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Adam Lesser

Analyst Gigaom Research

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