Cleverly, Oak, along with some other venture firms such as VantagePoint and New Enterprise Associates, realized becoming a massive venture capital firm would help them raise money. Their size allowed them to absorb large checks the large pension funds wanted to give them. Yet, they retained the “VC” status, and thus were appealing to LPs (Limited Partners), who at the same time were avoiding private equity and hedge funds because of the crowded nature of those industries. (Indeed, NEA and Oak alone accounted for 20 percent of all VC raised in 2006.) Finally, with legal mandates to invest in the VC sector, the LPS were forced to invest in some weak VC firms. There simply wasn’t enough room in the great VC firms — Sequoia, Kleiner, Benchmark and their ilk — to absorb all the LP money. The vast majority of VC firms actually lose money, and yet many of them have been supported year after year because of the crazy excess of money flowing to the sector.
This looks very similar to patterns described by G.A.Akerlof, et al in:
- Looting: The Economic Underworld of Bankruptcy for Profit
- Brookings Papers on Economic Activity, Vol. 1993, No. 2 (1993), pp. 1-73
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