PremiseThere are issues with the venture-capital industry and therefore issues for entrepreneurs. The number of VC firms is decreasing, but does that mean entrepreneurs will too? In 2009, "The number of active venture-capital firms fell 13% to 882 from 1,019 in 2007, according to the NVCA." (WSJ)
Dot-com Bubble Flawed Model During the dot-com era, a start up would be funded by VC, the VC could push it to an IPO where the limited partners (VC firm) could exit the deal cleanly with much more than they invested. Some start ups pissed away cash and when their business went under, it was the share holders (public and private that suffered). The VC firm got away with profit. But that hurt that specific VC firm and the industry. It's less likely that an investment bank is going to help broker a sale or IPO for a VC if their last fund failed once it hit the public market.
The there's been a decrease in IPOs since the 2008 recession, but that is not the only reason why.
"While venture-capital funds sank $29.7 billion into start-ups in 2008, they produced just $24.9 billion from IPOs and the sale of start-up firms last year, according to VentureSource, a research firm owned by News Corp." (WSJ) Many start-ups were not able to raise more in an IPO than they initially got in VC.
Current State of VC Depending on who you are how much "a lot" is to you, you may feel like you have better access to "a lot" of funding because there are more angels or incubators that supply seed funding, offering smaller amounts.
Another scenario entrepreneurs might notice is that since there are less VCs, those VCs must naturally be more selective, but they offer higher rounds of funding. Since most tech ideas need less infrastructure (and therefore less cash) to launch as a business, those VC's look to offering higher rounds of funding to ideas that are already implemented. There are less VC firms, less capital being managed and less funds raised, but I did not find the average size of current funds being raised.
Future of VC What is the future for VC? David Aronoff, a parter at Flybridge Capital believes "The number of VC's must shrink."(FastCo) Fast Company notes "by some estimates the 1500 firms today will be just 500 within 5 to 7 years." (FastCo) So the future may be smaller rounds. Smaller rounds for more viable ideas that earn the principal back to the limited partners plus profit sounds gravy. I think the key to getting there is prototyping and iterating. Then number of VC firms is decreasing, but they won't disappear, they'll change.
I've been meaning to post a list of incubators that provide support via a blend of physical working space, server space and funding in New York City. It's coming up hot in the next post.
Sources: WSJ, Venture Capitalists Head for the Door, http://online.wsj.com/article/SB124416376153487535.html
Fast Company, Venture Capital - Under Siege? http://www.fastcompany.com/1627652/venture-capital-under-siege
Insightful but not quoted: eFinancial News, Venture capital firms slash staff numbers http://www.efinancialnews.com/story/2011-01-10/vc-firms-slash-staff