VC Points Out That VCs Might Have A Burn Rate Problem Of Their Own

@alex / 12:07 pm PST • November 3, 2014

Image Credits: Ben Watts / Flickr under a CC BY 2.0 license. (Image has been modified)

Your startup loses too much money, but even worse, the people supplying you with cash might be running a bit light themselves. Following the endless commentary regarding burn rates, and startup “risk,” Fortune’s Dan Primack pointed out that some venture capitalists are investing faster and spending more on non-essentials than before.

Maybe the venture capitalists have a burn rate problem of their own.

I kicked through the idea with New Enterprise Associates’ Jon Sakoda recently over some deeply unironic coffee at the Creamery. He published a bit of a follow-on analysis today, looking into how much money venture firms have raised, how much they have left, and what portion of that remaining capital is for new investments, compared to prior commitments.

Sakoda’s take isn’t very pretty:

Using a set of assumptions* to gauge how fast each fund invests their capital, we can estimate how much capital is reserved across the industry. Based on the chart below, our best guess is that the industry will have approximately ~$40 billion of available capital and ~$26 billion of capital earmarked for reserves at the end of this year.

He goes on to caveat those figures in two ways:

Venture backed companies (from all sources) are raising ~$10 billion PER QUARTER. If the VC industry alone were to attempt to fund all current VC backed companies at today’s levels through a downturn, we would effectively run out of reserves in 3-4 quarters. It is obvious that the industry investment pace would have to slow down dramatically, at least 30-50% from current levels, in order to extend the runway of our reserves through the cycle.

The ~$26-40 billion in capital that is reserved must be shared across thousands of companies that have received >$160 billion in venture financings between 2009 and 2014.

So things could be better.

Every time I sit with a venture capitalist and talk about the money world, I hear the same thing: There is so much fucking money out there right now looking for return. Bored capital leads to overinflated private corporation valuations, mind you, so that fact is hardly surprising given what we are seeing coming out of the other end.

At the same time, you have to wonder if all the majors could raise another billion each right now, and if not, what might happen to the pace of investment. If seed and A valuations start to crumble, what does that mean up the stack?

Sakoda sounds the alarm mildly: “As an entrepreneur, it is tempting to be lured into a false sense of security or paranoia by knowing whether your existing investors can fund you through the next economic cycle.” You get to handicap where we are in the cycle on your own, of course.

The standard rules apply: Great companies will always be able to raise, and downturns won’t stop the next real unicorns. Blah blah, whatever.

https://twitter.com/alex/status/517020878748782593

VC Points Out That VCs Might Have A Burn Rate Problem Of Their Own

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