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It's a hard time to be an established venture capital firm.
There are a ton of investors chasing a few great ideas, and the pressure is showing in a number of ways, according to a midyear report from Fenwick & West.
A surge of newcomers. The report found that 2017 is on pace to see the highest number of first-time venture capital funds formed in more than a decade.
Lots of new funds closing means at least one thing: venture capital firms face increased competition to get in on the best deals. The creation of all these funds is also happening at a time when entrepreneurs have more early stage financing options than ever before.
Less money to go around. Despite the growth in the number of new funds this year, the report says the amount of money entrusted to VCs is on the decline overall, compared with 2016.
Founders holding out for more. Crowded conditions in venture capital seem to be driving another trend: investor-friendly deal terms declined to the lowest level since the end of 2014. These are the kinds of terms that can give VCs a chance to hoover up bigger stakes in a company without paying higher prices for them over time, or to get a higher payout than founders and employees with stock options.
In one famous example, investor-friendly terms meant that Box co-founder Aaron Levie owned about 4 percent of his business at the time of its IPO in 2015, but several investors in the company held far larger stakes -- and employees didn't recognize quite the windfall they'd hoped for from their stock options.
Now, founders seem to be demanding simpler term sheets, and a promise their teams will be rewarded handsomely should their start-ups go public or get acquired.
General malaise. University of San Francisco professor Mark Cannice, who has been tracking VC confidence levels for almost 14 years, reports that on a scale from 1 to 5, that score has dropped to 3.52, below the lifetime average of 3.72.
Among the issues dampening VC confidence are "Potential new immigration constraints, high costs of living and general political uncertainty," on the macro level, and high late-stage deal valuations, which means it's more expensive than ever to get a stake in companies that are likely to sell or go public.