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Post-boom future of funding

In response to the October 10 Perspectives column by Bill Reichert, "Why the roaring '90s are dead and gone":

I agree with Mr. Reichert's characterization of how the expectations of entrepreneurs and VCs (venture capitalists) alike must change as the market washes out the excess capital that flowed into the venture industry over the last five years. The situation will become more volatile, however, when VCs go out to raise the next round of funds over the next couple of years. Where will limited partners put the money?

Returns will be down across the board, but relative returns will not present a very accurate picture of performance on which to gauge a new cycle. In past down cycles, sticking with the blue-chip names has been a safe strategy for limited partners, but many of the blue-chip VCs were the worst offenders in raising mega-funds. It's clear that the mega-funds cannot generate adequate returns in the current economy, and even chopping a billion-dollar fund into three pieces does not produce a very manageable fund size, as Mr. Reichert demonstrates.

In addition, many of the blue chips are experiencing contentious partnership issues, making them risky bets for new fund commitments. Some of the big partnerships will break up or spawn new funds as junior partners leave for a larger piece of equity on their own, forming the new "boutique" firms Mr. Reichert describes. But the few successful investments between 2000 and 2003 will have many paternity claims attached to them, making it difficult for limited partners to assess individual performance for some of these new fund hopefuls.

In light of this, I'd be interested in what Mr. Reichert is hearing from limited partners, how they view their commitment to the asset class, and how they are sorting out who they will fund.

John Foster
Portola Valley, Calif.