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The Denominator Effect

Published: 8/20/2009 9:52:23 AM

Venture capital firms are raising less money these days.  Why is that?

The primary reason is that their limited partners - university endowments, pension funds and wealthy family offices - simply have less money to invest due to stock market and other markdowns on the value of their portfolios.

Since the money pie has gotten smaller, this means that the amount of the pie that is allocated to "alternative investments" such as venture capital is reduced, even if the percentage of the pie remains the same. This is the denominator effect.

Thus, it behooves the entrepreneur seeking funding to understand that there is a greater emphasis on capital efficiency for their entrepreneurial ideas.

Cheers,

Don Jones

VentureDeal

 

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Don Jones
CEO, VentureDeal

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