According to the press release, $8.4 billion was invested in 765 deals for US-based venture capital-backed companies. On an annualized basis that equates to over $34 billion being invested into venture-backed companies. While total investment in 2011 will likely be below $32 billion, the trend give me pause. In my experience, when the venture industry raises and invests too much money in a given year, performance suffers. The question then becomes, how much investment is too much investment?
As the chart shows, at the peak of the internet bubble in 2000, there was over $94 billion invested in over 6300 deals. The returns from funds formed in 2000 (known as the 2000 vintage year) are very poor. Cambridge Associates reports that 2000 vintage funds have a median IRR of (3.14%) and average IRR of (3.35%) as of June 30, 2011.
A warning sign goes off in my head when annual venture investment is greater than $30 million. At above a level of $35 million, my view is that there is a danger that too much money is chasing deals, leading to overpaying for deals (higher valuations) or funding too many companies in a given sector, or both. While the industry is a bit away from the $35 billion level, this is something I will watch carefully.