Fred Wilson, managing partner at Union Square Ventures, is a preëminent figure in venture capital. He’s been at it for 25 years: his first big deal was an investment in the Web community GeoCities, which Yahoo bought for about $3 billion in 1999. He went on to back startups including Twitter, Zynga, and Foursquare. But from his successful perch, Wilson worries that his industry is in trouble.
Lately VCs haven’t come close to generating the returns on their investments that made them stars in the 1990s. It’s even becoming questionable what value they generate for society. IT companies are finding it cheaper than ever to get going now that they can rent computing resources from providers in the “cloud.” Meanwhile, alternative funding mechanisms are proliferating. And because VCs often shy away from technologies that take a very long time to bear fruit, such as many in energy or biomedicine, some critics contend that VCs flood the world with too much money for ideas that don’t solve big problems.
In a recent interview in his Manhattan office with Technology Review information technology editor Rachel Metz, Wilson offered some ideas for fixing venture capital.
TR: What is the biggest issue facing your industry right now?
I think a lot of venture capital firms are having a tough time raising money.
Because the returns haven’t been very good in the venture capital industry for a long time. I think if you talk to the investors in venture capital partnerships, they’ll tell you that they’re very much on the fence on venture capital, and if venture capital continues to put up mediocre returns, they’re not going to stick with it forever.
What is a mediocre return?
Anything less than three times your money over a 10-year period.
Why is venture capital necessary to foster technological innovation?
The reality is, venture capital has always been a place where high-risk ventures can get funded. I think it still is the best kind of capital for somebody who’s building a company that has a lot of risk but has a lot of upside as well.
But it seems like the need for VCs is narrowing. These days, it’s much cheaper to get an IT company off the ground. And there are more angel investors who get companies running before VCs can jump in.
There are a lot more places to go for money, which I think is a good thing for venture capital, because it allows more entrepreneurs to get going. We see more projects. There are more quality opportunities for us to invest in. At first blush, you might think that more capital means more competition. But I think what more capital really means is more entrepreneurs.
Some startups are getting money through crowd-funding platforms like Kickstarter (in which Union Square Ventures is an investor). Is this threatening to the venture capital model?
I think it’s too soon to tell. Many of the projects that get funded on Kickstarter aren’t really businesses. They’re art projects, films … things like that. There’s a small subset of projects that get funded [on Kickstarter] that could turn into companies. And some of them might actually become venture funded, and some of them might not need venture funding because they raised enough money with their Kickstarter project that they can get all the way they need to go without it.
Could part of the problem be that there’s actually too much money available for entrepreneurs?
I don’t think there’s too much money sitting around. I think there’s too much money in too few hands. So when six white guys in suits control two and a half billion dollars, that’s not a good thing. Instead of being allocated just to one firm, it would be better if that two and a half billion dollars was allocated to 25 firms at $100 million each. It would lead to more diversity or people trying more things: data sciences, urban sciences, transportation, energy, materials science, and many others.
How do you fix a problem like that?
It’s a challenging problem, because I think people who invest in venture capital like to go into deals together, and they like to invest in firms that have brand names and have long track records. That’s what leads to a concentration of money in a few big-name firms. I think it’s a little bit of how the system is just set up.
One of my hopes is that as there are more angel investors out there, and the amount of money it takes to make a company successful comes down, entrepreneurs are going to have more options.
This article originally appeared on August 21, 2012, and was updated on September 7, 2012.