The venture capital industry may be stuffed with cash right now but that hasn’t stopped Lightspeed Venture Partners raising the biggest new fund of the year so far, at $800m.

When you ask where all this new money keeps coming from, Silicon Valley veterans have taken up a common refrain: the typical answer is “from overseas,” or “from Europe.” This is usually accompanied by a small involuntary smile that is meant to make you think: “Dumb Money” (at least, that is how it seemed at the National Venture Capital Association’s annual meeting in the Valley last week.)

Lightspeed claims that the performance of each of its seven previous funds has been in the top quartile of the industry, so it’s easy to see why it was besieged by investors this time around (the size of the fund was raised from the initial target of $675m.)

This points to a pattern in the VC industry that has been taking shape since the dotcom bust. As described by Gerry Langeler of Seattle VC firm OVP (and pointed out to me by Larry Aragon of Venture Capital Journal), the average VC fund has doubled in size, to $200m, since 2000. That reflects a concentration of money in the hands of fewer managers with better track records.

The trouble is, the VC world still has too much cash driving down returns, whoever is investing it. This was Michael Moritz of Sequoia Capital, also talking at the NVCA meeting last week:

In other industries most of the profits are concentrated in the hands of a very small number of firms, and venture capital is no different.

Like the inhabitants of Lake Wobegone, Silicon Valley’s elite financiers may all think they can be above average, but logic suggests otherwise.

May 13th, 2008 in Uncategorised | Permalink