On October 1st the revised “Volcker” rule goes into effect. The core of the revision is a loosening of regulations on how much banks can divest as both an LP and a GP into venture capital and venture debt funds. What will the impact of this change be?
At it’s core, the intention of this change in to empower banks in smaller venture ecosystems to inject dry-powder into the venture funds in those cities. Given the relatively low levels of existing dry powder in “non-traditional” venture markets and the readily available capital in financial institutions throughout the U.S. (the average assets is the highest it has ever been for commercial banks in the U.S) the ratio of capital that can be injected into these markets could have a noticeable impact.
What will be interesting to watch is if this change to the Volcker Rule combined with the migrations away from cities spurned by the COVID-19 pandemic. As skilled tech workers move away from major cities to more affordable locations and smaller markets will this accelerate demand for venture dollars and deals in this market. Increased demand for deal flow will attract investors from primary markets to invest in these cities, or for fund manages to move in and become a primary venture capital provider for this region. Either way it will be fascinating to see the impact of regulatory changes and COVID-19 on venture investing and startups.