According to the Private Equity and Venture Capital (VC) database and research company PitchBook, deficit spending remains the looming factor shaping the current state of VC fundraising.
For the fourth consecutive year, VC firms have invested more capital than they have raised indicating a dangerous cycle of deficit spending. Interestingly enough, despite the -$7.6 billion of net VC capital, VCs closed a record number of funds. In 2012, 90 VC funds were closed highlighting the 61% surge over the last two years.
Nonetheless, deficit spending remains at the forefront of the evolving VC environment. This four year cycle can be attributed to the growth in investments from corporate VC firms and angel investors and a reduction in capital overhang. That being said, the availability of dry powder has also been affected. Since 2008, the amount of dry powder available to VC firms has reduced a staggering $21.8 billion. With fewer cash reserves on hand, fundraising sustainability comes into play.
As the deficit spending cycle continues, it raises public concern and triggers the need for a systematic and operational change within the VC industry. Bearing in mind the importance of having capital on reserve and the annual average VC investment of $26.6 billion, if VC firms continue to invest at their current rate, they will have less than three years of capital available to them. Whether it’s re-evaluating investment strategies or seeking other avenues to attract capital to an asset class, VC firms must find a way to better utilize their available capital.