I recently re-read Fred Wilson’s 2009 blog post on “The Venture Capital Math Problem,” and it got me wondering whether emerging markets private equity and venture capital (“EM PE / VC”) might face similar capacity constraints to U.S. venture.
If you haven’t read Fred’s post, you should. But in essence, Fred looks at the fundraising figures for U.S. venture and, after making some assumptions about required returns, determines that the volume of exits caps the industry between $15B to $17B in annual fundraising. In his words, “the venture capital asset class does not scale.”
What I thought I’d do is take a page from Fred’s playbook and see whether we can back into a reasonable estimate of the absorptive capacity of EM PE / VC.
Our conclusion: annual flows to EM PE / VC may need to decline by 60%.