You may recall that I asked a year ago for venture capitalists, who weren’t at that time funding much of anything, to start spending money if only to jump-start the economy. They didn’t, of course. So why would they now start to fund every deal in sight? That’s simply because their alternative is to give back the money and then some, which they will never do.
In 1999-2000 — at the very peak of the dot-com boom — venture capital firms were not only taking companies public at a furious pace, they were just as furiously raising new venture funds — funds that will shortly be coming to the end of their lives. Throughout the fixed lifespan of these funds venture capitalists are typically paid 1-2 percent of the total fund per year as a management fee. If a VC raises $100 million for a fund with a six-year life, they’ll take $2 million every year as a management fee, whether the money is actually invested or not. Any money that remains uninvested at the end of the fund must be returned to the investors ALONG WITH THE ASSOCIATED MANAGEMENT FEE.
Right now, there is in the U.S. venture capital community about $25 billion that remains uninvested from funds that will end their lifespans in the next 12-18 months. If the VCs return those funds to investors they’ll also have to return $3 billion in already-spent management fees. Alternately, they can invest the money — even if they invest it in bad deals — and NOT have to cough-up that $3 billion. So the VCs have to find in the next few months places to throw that $25 billion. They waited this long in hopes that the economy would improve and that technical trends would become clear so they could do their typical lemming-like jump off the same investment cliff as all the other VCs. Well, we’re at the edge of the cliff, so get ready for the most furious venture investing cycle in history.