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One more from Marc

Marc Andreessen wrote a bonus 3rd post on venture capital.  I recently posted on his first two excellent writings.

This post from Marc does a great job explaining why there will perpetually be too much money in venture capital.  With a fixed asset allocation for venture capital, institutional investors will continue to allocate money to VC even as returns continue to be sub-par.  At some point, there will be a good year, and there will always be some number of funds who do well (or get lucky, depending on your point of view).  Investors are willing to do poorly for a while in order to capture these outsized returns.

I think that this trend is exacerbated in the Boston market where there have been proportionally many fewer very large VC returns since the telecom bust.  Boston will need to be strong in a new sector (perhaps clean energy?) in order to be a hub for outsized returns.  Without some of these, a disproportionate share of the disproportionately large VC allocation will continue to go to the West Coast.  That might make investment sense, but it isn't great for the future of Boston.

I would have hoped that the big Internet and Telecom busts would have scared away enough capital to make venture investing seem more rational, but that hasn't been the case.  There is so much money around to be invested that these losses are still mostly noise to institutional investors.  So, smart investors have to find segments that are underserved.  Perhaps early-stage VC in Boston is one area that is underserved.  Most existing VC funds are hesitant to invest so early nowadays.  A few new firms are trying to capitalize on this opportunity, including .406 Ventures and Kepha Partners, both good friends of mine.


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