High-profile, billion-dollar sales of some venture-backed companies are making the venture capital industry increasingly competitive. The question of how to become a better investor is the topic of the "500 Startups" conference in San Francisco.
There are a range of challenges. Companies are staying private longer, delaying the payday for VCs; tech start-ups require less upfront funding; and a rise in early-stage angel investment is delaying VCs' access.
These trends, along with economic uncertainty, pushed total VC investment dollars down 12 percent in the first quarter from fourth-quarter 2012. At the same time, the number of deals fell 15 percent, according to the PricewaterhouseCoopers/NVCA MoneyTree report.
Headline-making deals are attracting more investors just as there's a shrinking pool of desirable start-ups.
Silicon Valley still dominates VC investment, but New York is on the march. Between 2003 and 2013, the New York region's share of all VC deals in the United States more than doubled, from 5.3 percent to 11.4 percent, while Silicon Valley's rose from 28.6 percent to 31.7 percent, according to Center for an Urban Future. Both Silicon Valley and New York stole share from New England, whose share dropped from 14.8 percent to 10.2 percent over the decade.
East Coast VCs, including New York's Union Square Ventures, are celebrating Tumblr's $1 billion sale to Yahoo, the largest venture-backed exit of a New York company.
Fred Wilson, managing partner at Union Square Ventures, told a room full of West Coast investors at the conference that New York trails Silicon Valley by about 30 years in its growth trajectory.
"We're way behind Silicon Valley and I don't think we'll ever catch up, but I do think New York is an exciting place to be right now," he said.
Both regions have advantages, but "there's not as much of an echo chamber in NYC because there are so many different industries," Wilson said. "I think there's a lot more diversity of thought." The next big start-up community will probably emerge outside the U.S., he added.
So what's the secret to being a successful VC investor? At 500 Startups, there's a debate about the value of an entrepreneurial background, or more traditional MBA or business experience.
Especially for early-stage investments, on-the-ground experience outweighs any academic training, according to Dave McClure, founder of the 500 Startups incubator.
"Engineering, design, marketing, running start-ups or working for platform companies—we think those skills are really helpful when the companies are getting off the ground," he said. "They don't really need too much capital; they probably need more guidance and mentorship."
For others, the key is looking outside the expected sectors and regions.
"We think, how do you find those entrepreneurs who are in Detroit, who are in places outside of what you might think of as the traditional entrepreneurial hotbeds?" said Vanessa Colella, managing director at Citi Ventures. "Because now, the technological capabilities and the financial abilities have made it such that entrepreneurs are really able to spring up in lots of different places." With so much competition for the best deals, it's not just about money. Former entrepreneurs position themselves as better advisors, while VCs with ties to corporate parents such as Citi,GE or Nike, tout their access to vast resources.
One factor that's working in all investors favor: As startups pop up in a wider range of places, there are a growing range of corporate buyers.
"As the start-up and technology market matures, one thing that's happening is that more companies are doing acquisitions," McClure said. "It's not just Google and Facebook andMicrosoft, but companies like Nike and Johnson & Johnson and Procter & Gamble. Companies you wouldn't normally think of as technology acquirers."
—By CNBC's Julia Boorstin. Follow her on Twitter
@JBoorstin. Additional reporting from Harriet Taylor.