Venture capital fund raising increased last year over 1999’s total, but the gains do not initially look as large as in previous years, according to preliminary data from Venture Economics, publisher of Venture Capital Journal. Some VCs say that 2000 was a lucrative year, particularly the first half, but the outlook for 2001 is grim.
Early estimates show that 401 funds raised over $76 billion in 2000, and analysts say the final tally of VC funds raised in 2000 could be as high as 500. In 1999, 391 funds raised $59.23 billion.
Thus far, the 2000 estimates do not show a substantial increase in the number of funds raised, which increased 55% in 1999 from 252 in 1998. However, VC firms have already increased their invested dollars by 35%, even by conservative estimates.
One of the big stories in 2000 was the explosion of mega-funds. To date, funds that raised over $500 million increased 63% to 49 in 2000 from 30 in 1999, while there has been no increase for the number of funds that raised less than $500 million.
The amount of money raised by funds with a total capitalization of less than $500 million appears to have steadied at about $40 billion. Larger funds increased their total take at least 78% to $42.61 billion in 2000 from $23.97 billion in 1999.
“The first half of the year was pretty good,” said Kevin McQuillan, founder and general partner at Charter Growth Capital (CGC). “The Nasdaq was doing well, and everyone was flush with cash.”
CGC completed raising a $465 million fund in the second quarter of 2000. McQuillan said Charter purposefully raised a larger fund this time, because the firm was moving to a longer investment cycle.
“It’s too time consuming to raise a fund every 12 to 18 months,” he said, adding that his firm is considering a three- to four-year time horizon. Based in Palo Alto, Calif., CGC focuses on expansion-stage companies in the information technology sector.
The second quarter looked to be the peak of activity with 159 firms raising $24.93 billion. According to Venture Economics, 108 firms raised $27.98 billion in the third quarter. In the third quarter, the average firm raised $259.1 million, which was up 65% from $156.8 million in the second quarter.
Fourth quarter numbers are not complete, but the average size of the funds raised initially appears to have returned to its second quarter levels.
Doll Capital Management, an early-stage investor based in Menlo Park, Calif., closed a $450 million fund in the fourth quarter of 2000. David Chao, managing general partner, said he sees three factors that contributed to what some have called a tightening market:
* Major limited partners such as pension funds or funds-of-funds have reached or over-allocated their VC budgets;
* As the investment and fund-raising pace has increased over the past couple years, VC firms have successfully solicited their favored LPs more frequently; and
* Some of those VCs have gone back to their top LPs asking for larger investments.
Going forward, McQuillan thinks many firms are expanding their investing horizons. He said VC firms might also be focusing on their current portfolio companies, particularly in a potentially illiquid market.
“It takes a long time to grow a successful company,” McQuillan said, adding that a possible slower investment pace combined with the full coffers of many VC firms could cause 2001 to be a down year in fund raising.
Between 1999 and 2000, the number of early-stage funds seems to have remained fairly constant, hovering around 180. However, early-stage funds brought in at least $35.36 billion in 2000, a 38% increase from $25.65 billion in 1999.
Late-stage funds, which had increased between 1998 and 1999, declined about 57% to 40 in 2000 from 92 in 1999. Based on preliminary estimates, late-stage funds raised $10.42 billion in 2000, representing a 42% decline from 1999’s $18.02 billion.
Balanced-stage funds seem to have been the big winner in 2000 with at 132 attracting $23.62 billion, a 111% jump from the $11.2 billion raised in 1999 by 87 funds.
First-time funds were as successful in 2000 as they were in 1999. No fewer than 130 VC firms raised a first fund in 2000, which is similar to 1999’s 128 first-time funds. However, the 2000 vintage funds only raised $9.89 billion, which is down 32% from the $14.64 billion raised in 1999. By comparison in 1999, firms raising first time funds increased 75% from 73 firms in 1998, and those firms raised 266% more capital than 1998’s $3.99 billion.
Chao echoes the common sentiment that new funds and spin-offs may have a more difficult time going forward, but the larger players will continue.
“When the market is coming down,” he added, “people get more conservative,” noting they may take more time to commit to a decision or choose not to invest.
McQuillan agreed, “LPs will be a lot pickier about where they put their money.”
VC Fund-raising by Year ($ in billions)
Year No. Funds Amt. Raised
1997 228 $17.86
1998 252 $28.72
1999 391 $59.23
20001 401 $76.16
1Figures for 2000 based on preliminary data