It's a well known fact that there are about half as many venture funds today as there were in 2000. While this can be attributed to the burst of the dot-com bubble, the decline is still a sharp one. Michigan Growth Capital Symposium (MGCS) Founder David J. Brophy, Director and Professor of Finance at the University of Michigan Ross School of Business said that drastic adjustment has reverberated through the limited partner community. "It has been very tough to separate them from their money," he said. "Technology and the application of technology is key right now as far as venture capital is concerned."
While changes are afoot, it is characteristic of the venture capital and private equity sectors to be in a constant state of transition. As the growth capital industry is in flux, larger mega-funds are finding ways to engage with companies much smaller than their usual targets. "On one hand, that's good for the venture-backed companies, because now as they enter their later stages they've got large, large funds who are looking at them and are potentially willing to come in as later stage ground investors," said Brophy. "As they get into the growth capital business, they're extending deeper and deeper into the territory that we normally would associate with venture capitalists."
As big funds are doing growth capital investment along with buyouts, the industry is seeing much more leverage for recapitalizations and partial ownership deals. "There's still an appetite, of course, for control, but increasingly we're seeing those kinds of investments involve the retention of management or the transfer of management equity," said Brophy. "These big companies have not, to my knowledge, gotten down into the seed capital business yet - but I wouldn't be surprised if we had some side funds put in place by big private equity shops for the sole purpose of seed investments. That would mean more competition for existing venture capital funds, but also more chances to partner with those big funds who probably are not as familiar with seed and early stage investing as existing investors are." The potential for more available capital, along with a likely tendency for the big fund parent of those seed funds to invest down the road in later rounds, would be a bonus for entrepreneurs.
Brophy noted that the MGCS always strives to reflect the current state of the industry, and these shifts are no exception. "We're likely to see some bigger funds invited to participate," he said. "We're likely to see a bit more representation of growth capital kinds of companies presenting, and we'll have our usual array of startup and early stage companies as well. So we'll be crafting a program that, upon inspection, will look very much like what's going on in the market - and leaning in the direction of what we expect to be coming down the road."