What Is the Impact of Private Equity and Hedge Funds on VCs?

Question: With the private equity and hedge funds raising record funds where does that leave venture capital? What are your thoughts on the future of the industry?

Our Take: Right now, we’d say that PE and Hedge Funds raising money is not having a material effect on the VC industry. There certainly has been a ton of talk about how these mega funds will move downstream investing in less mature companies and squeezing out VCs, but to this date, we haven’t seen this type of behavior.

So far, there seem to be a couple of trends. One, many of these mega funds have allocated capital to venture deals, but needing investment managers, they are willing to invest their capital directly into VCs raising money. From that aspect, there is an additional pool of capital from which VCs can raise money.

Secondly, we have seen PE / Hedge funds become more active in funding later round company financings. This, too, is a nice “problem” to have, as some of the later rounds in VC backed startups are so large that it’s nice to have an investor with a larger check book.

As previously mentioned in earlier posts, VC funds have gotten smaller over time to deal with a more efficient market and smaller investments per company. It is unclear whether or not a PE or Hedge funds with multiple billions under management want to spend time investing such a small portion of their capital to directly fund VC fundable deals.