TechCrunch: The End Of Venture Capital As We Know It?

TechCrunch 120708,The End Of Venture Capital As We Know It?.

The carnage on Wall Street is having a trickle-down effect on venture capital firms. The limited partners who typically invest in VC funds—university endowments, pension funds, investment banks, other institutions, and wealthy individuals—are short of cash right now. Harvard’s endowment lost $8 billion in the past four months alone. Many limited partners simply cannot honor capital calls from VCs. (When a VC firm creates a new fund, it does not collect all the money at once. Instead, it receives promises from limited partners that they will invest when the capital is needed).

Rather than face the penalty of default, limited partners increasingly are trying to sell their commitments at deep discounts on secondary markets. Conversely—knowing that they may not be able to call in their chits—VC’s are motivated to slow down their investment activity.

All of this is to be expected during a recession. Entrepreneurs wait for a rebound, and then their startups get funded once again.

But what if this recession (and bear market) lasts longer than a year or two? And what if startup founders don’t feel like waiting around for VCs and their limited partners to get back on their feet?

Startups can be run so cheaply now (with open-source software, cloud computing, and virtual teams spread across the Web) that many more can achieve profitability without any VC cash. Up until recently, they still happily took that cash when it was handed to them. But certain classes of startups, especially Web startups, may now find they don’t even need that money.