The loss of first check investors

Victor Basta hit a nerve with his article on TechCrunch last week describing the “implosion” of venture capital over the past 36 months. Using PitchBook data, he found that the total number of VC rounds committed to startups has declined from 19,000 in 2014 to 10,000 estimated for this year, even while dollars invested has remained mostly static.

Silicon Valley is no longer making it rain so much as it is making it trickle, and that makes it much harder for startup founders who are just trying to get going building their companies. My conclusion is that we have a massive “first check problem” that goes beyond the vagaries of the investment market.

First though, let’s go through some alternative explanations. Basta posits that the end of the app and SaaS booms are largely to blame, along with a drop off in investment in fintech.

Union Square Ventures investor Fred Wilson added his own two cents over the weekend, writing that “When I talk to my friends who do a lot of angel investing, I hear that they are being more selective, licking some wounds, and waiting for liquidity on their better investments.” Similarly, “When I talk to my friends who started seed funds in the past decade, I hear them thinking about moving up market into larger funds and Series A rounds.” Wilson’s conclusion is that “For investors, it means seed rounds are going to be the place to be.”

There is some truth that investors are moving upstream. I analyzed a list of top angels and early-stage investors from 2012 to see how some of the highest-flying players in the Valley have changed their careers over the past five years.

The most common pattern is simply that highly-successful angels now have their own institutional funds or have joined well-established VC firms in the Valley. Kevin Hartz joined Founders Fund last year, Keith Rabois joined Khosla, Shervin Pishevar founded Sherpa Capital in 2013, Joe Lonsdale put together the ill-fated Formation8 in 2011 before launching 8VC in 2015. And of course, Marc Andreessen and Ben Horowitz converted a very successful angel investing career into one of the top mega funds of the Valley.

And a huge number of that list of top investors also expanded the size of their funds. Take Garry Tan, for example. He founded Initialized Capital in 2011 with a $7 million first fund, but last year closed on a $115 million vehicle for the firm’s third fund. That’s the story at a lot of places, from accelerators like Y Combinator…

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