A big name in the venture capital space says that up to half of the firms will go out of business or fail.
Josh Wolfe, co-founder of the New York venture capital firm Lux Capital, says the shrinkage will be caused by broken partnerships and strategies that are “feckless” and too weak to fix. He also says that he is worried that investors have put too much faith in an asset class that is hard to sell.
In the company’s letter to shareholders for the first quarter, Wolfe said that the industry has grown from about 1,000 companies in 2008 to over 3,400 today. He thinks that the number of companies will drop to about 1,700 in the next few years, with many “minows” and a few “megas.”
He says that “minnows,” or funds with less than $100 million in assets, will have a hard time raising a second fund. On the other hand, “disinterest, disapproval, or indigestion from allocation” will force the bigger funds to cut back on their overly ambitious fund goals.
Wolfe said that almost half of the capital committed this year came from just two well-known companies. He also said that down-rounds in U.S. VCs made up almost 25% of funding.
Wolfe not only thinks that the venture capital industry will change, but he also thinks that the real cost of capital will go up. He did this by pointing out that unions are becoming more important in raising wages.
The person who invests in AI companies like Hugging Face and TogetherAI says that maintenance will be the next big thing in investing.
“The recent fever pitch of growth has sucked up all the attention and money, leaving the important virtue of maintenance to the side,” he says. “But as rates go up and the cost of capital goes up, the narrow focus on the new has put the old at risk of rust and demise.”
He said that Lux puts its money into businesses that help keep U.S. defense assets in good shape. He says that America’s defense depends more and more on being able to keep systems from the 1980s running cheaply and even on their own.
