PALO ALTO, Calif. — The number of venture capital firms controlling the bulk of the business will plummet to 50 within three to five years, from more than 900 now, a study by late-stage venture capital firm Focus Ventures, Palo Alto, shows.
Firms that will last are now big enough to corner the market, with enough unspent capital raised in their funds to finance all early stage deals for the next three to five years, the report stated.
They also perform better: Over the last 20 years, the big firms' funds earned an annual internal rate of return of 32.7%, while the remainder earned a collective IRR of 5.4%.
"There'll be 10 superstars and 50 really good firms left," said Steve Bird, co-founder of Focus Ventures, and author of the white paper. He said the survivors will be powered by strong staffs built around their original founders, with networks of entrepreneurs and individual investors.
Mr. Bird put Kleiner Perkins, Caufield & Byers and Sequoia Capital, both of Menlo Park, Calif., at the top of his list. He wouldn't identify the others. He also did not include his own firm in the paper.
Mr. Bird said the economics of the venture capital business do not support hundreds of firms. An average of $70 billion to $90 billion is committed annually to venture capital, but the industry only invests $15 billion to $20 billion a year, he said. Investors "have committed capital that will never be drawn down."