VC funds have too much money

Yesterday’s Lex column in the FT (paywall) commented on the mountain of cash sitting in VC funds. According to analysts at Goldman Sachs, approximately $121bn is waiting to be invested. This reveals two things:

  • Investors are hungry for VC returns.
  • VCs are having a tough time finding viable investments.

The first point is understandable, given the paltry returns elsewhere.

The second is interesting. It’s not for a lack of startups vying for cash. And not just startups, there are plenty of ongoing businesses that could use an infusion, which they might not be able to get from ever-more-conservative banks.

Could it be that investment firms are understaffed? Or could it be that the opportunities don’t meet the requirements?

The pressure is on, as cash holdings weigh down the overall returns, which further down the line will affect the amount of cash coming in.

This could explain the interest of some VC firms in alternative investments. A few weeks ago Harvard Business Review looked at the surge of interest on the part of VCs in ICOs, or “initial coin offerings” – tokens issued on a blockchain that confer value or utility.

In spite of their tenuous legal situation (are they securities? are they currencies? For now they are largely unregulated), institutional investors are attracted by the potentially high returns and the liquidity. And institutional interest could explain why several recent issuances were sold out within minutes.

The danger is the paucity of supply relative to the funds available. VCs could end up competing for stakes in blockchain projects, which would push valuations to ridiculous levels.

There is no way that crypto investments could make even a small dent in the piles of unused cash. CoinDesk Research revealed that 2016 saw a total of $236m of investment in ICOs. Even if 2017’s offering were to triple, it would still be miniscule in comparison.

This creates a potentially dangerous situation. Even if only 1% of the surplus cash wanted to try out an ICO opportunity, the imbalance in demand and supply would distort market fundamentals.

A bubble in the ecosystem would do damage – when it pops, investment and development are likely to be set back for years.

 

 

 

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