A Pig Through a Python

Joseph W. Bartlett, Founder of VC

One of the conundrums in today's venture capital world has to do with (a) liquidity in a system, which would imply ample capital available for early stage companies and their entrepreneurs coupled with (b) a demonstrable lack of investment activity. The VCs, indeed, are up against funding deadlines, many of them raised huge amounts of money in 1999 and early 2000. And, according to the provisions of a typical limited partnership agreement, that capital has to be invested within four to five years, i.e., by 2003/4, or the commitments are cancelled. Nothing could be more lugubrious for a VC, who has spent six months on the road acquiring commitments, than to have to cancel the same for lack of activity in the portfolio. However, paradoxically, that seems to be the current situation... a lot of money, a lot of interesting opportunities and almost no activity. I have remarked frequently on one explanation for that phenomenon. That is, nobody wants to go first - to experience the so-called 'LST Effect.' For those who are not familiar with the D-Day landings, the troops came ashore in LSTs and the bows opened up on the beach. Unfortunately, the vanguard of the company being brought ashore, the first people out the door and onto the beach, usually suffered the highest casualties. No one wants to be labeled the bozo, the guy who refused to learn from experience and repeats the mistakes of 1999/2000.

There is, however, another problem that deserves more recognition than it gets outside of the inner sanctum of this business. Most people, when they are thinking of the professionally managed venture capital funds, fail to understand that the root problem facing the managers of those funds is not lack of capital but rather a lack of time. A typical venture capital fund is managed very lean and mean - a $200 million fund with, perhaps, four principals, backed up by a handful of interns and one or two administrative personnel. The Air Force developed over the years a 'Rule of Eight,' which suggests that a line or a staff officer should not have more than eight units reporting to him or her. In the venture capital universe, assuming lead investor status, that number is closer to four or five, meaning that no one professional, no matter how talented, can reliably and profitably keep an eye on more than four or five companies... and that "rule" is in effect when times are going well. When the investment climate turns against the investors, as it has recently, the companies become problem children and each requires a major time commitment. The result is not hard to figure out. There are only 24 hours in the day and there is only so much traveling you can do before you lose your sanity.

The short of the matter is that, in my view, private equity capital will free up only after the problem companies make their way through the system one way or another, either rehabilitated or abandoned. It is a little bit like the pig passing through the python... the python has to wait until that process is completed before it goes out to hunt again. There is plenty of liquidity in the system, plenty of money on the shelf. But I don't believe it will become activated until the pig has passed and the professionals have the time to look around for new investments.