#1 Thing the VC Industry Can Do To Save Itself (but can’t)

The VC industry is great catalyst of job and GDP growth in the U.S. Only, it has a major problem on its hands: it is going to shrink considerably over the next few years. The challenge is that investors like pension funds, college endowments, and wealthy families allocate a certain percentage of their money to the VC industry (e.g. 3%).

Now 3% of investments in 2008, before the stock market, real estate, and other categories crashed was a larger number than 3% of investments today. Unlike publicly traded equities, VC investments are very illiquid so what was 3% in 2008, with portfolios lower overall, might represent 5% of the portfolio today. Thousands of investors needs to shrink their VC allocation down from 5% to 3%, and that’s going to result in many VCs going out of business.

Here’s the number one thing the VC industry would like to do to save itself:

The VC industry should make an across-the-board cut of 30% to all internal company valuations.

Internal company valuations are required to report back to the investors but in reality represent a guess at the company value since the companies are private and the valuation is but a range. After cutting the valuations internally and reporting the new values back to the investors (that’s not a tenable conversation or legal) the investors’ portfolio allocation would back inline.

Since the portfolio allocation would be back inline investors can put new dollars into VC as the rest of the portfolio grows. As it stands now with a significant overallocation to VC, investors are going to allocate even fewer new dollars (or none!) to VC for a period of time until the existing dollars plus new dollars equals the desired percentage of the portfolio.

This strategy won’t happen but would be the number one thing the VC industry as a collective could do to save most of the size of the industry.

What else? What do think of this idea on how the VC industry could help itself?