Are all those new/small VCs and LPs coming to the market causing new bubbles? We think the opposite is true

This post is a response to two recent tweets from Semil Shah and Marc Andreessen. Semil Shah wonders if the number of small angel funds and first-time investors sprouting up could cause a bubble (with small b).  Marc Andreessen replied that there are “definitely too many new small angel funds”. 

While it is true that many smaller funds are sprouting up, how likely is this to lead to any VC over-crowding or bubbles?

Well, we know that smaller funds actually outperformed larger funds, at least historically. Smaller funds often have more skin-in-the-game (percentage of own money invested by General Partners). And now that smaller funds have the ability to syndicate it could further increase the overall percentage of skin-in-the-game in the VC eco-system. Software is giving small VCs access to “big VC” technology and deals (e.g. Mattermark).

The real question is, is the total amount of capital flowing into be changing? Probably not. Instead, it is the capital allocation process that is shifting. Below is what that already is starting to look like:

As a large VC fund it must be annoying to be outbid by a small newcomer. And indeed even my personal perception is that there is an increasingly popular style of investing based on blindly following VCs with celebrity status (or even outbidding them). Herd mentality is never a good thing and can lead to bubbles. But on the flip-side I also see true “field experts” getting access to deals and capital where they previously didn’t have such access. So the net result have a more diverse field of investors with widely differing investing styles (versus the fairly homogenous VC investor field we have seen for the past 25 years). And combine that with less friction in capital allocation (less lockups), and the VC market will start to look a bit more like public markets. And public capital markets, although far form perfect, have proven to be more efficient than VC historically, evidenced by higher returns.