Disbursement and Fund-Raising Rebound Hits Q1 Speed Bump –

After a red-hot end to 2003, venture capital deal making and fund-raising cooled off in the first quarter.

A total of 618 U.S.-based companies received VC funding last quarter, according to MoneyTree Survey data compiled by PricewaterhouseCoopers, Thomson Venture Economics (publisher of VCJ) and the National Venture Capital Association. That represents an 11.8% drop from the $5.25 billion raised for 739 companies in the fourth quarter. It was also lower than the tallies for the second and third quarters of 2003.

Health care deal momentum also stalled, as the combined biotech and life sciences sectors received just 28.13% of overall Q1 venture disbursements. This is a large percentage compared to a 10-year average of 13.52%, but it nonetheless fell short of the 31.23% that health care accounted for in the fourth quarter.

On a positive note, disbursements made in the first quarter of this year were about 10% greater than the $4.21 billion disbursed between January and March of last year.

The average deal size also hit its highest level-$7.49 million-since the beginning of 2002. Historical survey data almost always rise in subsequent quarters. For example, MoneyTree reported $4.92 billion of Q4 disbursements in its Jan. 27 press release, but later revised the figure upward to $5.25 billion.

Cash In Options

The quarter’s largest deal was for OptionsXpress Inc., a Chicago-based online brokerage that received $90 million from Summit Partners.

It is important to note that MoneyTree only includes called-down capital, which means that just $50 million of a $250 million commitment for Jazz Pharmaceuticals Inc. counts for the first quarter. Palo Alto, Calif.-based Jazz placed fourth in the Top 10 largest deals of the quarter, thanks in large measure to an additional $7.85 million called down from an earlier Series A financing.

Life sciences companies dominated the Top 10 list. Besides Jazz, which was one of seven such companies on the list, the others were AlgoRx Pharmaceuticals Inc., which pulled down $65 million; EXIMIAS Pharmaceuticals Corp. with $63.5 million; Synta Pharmaceuticals Corp. with $50 million; Salmedix Inc. with $45 million; Favrille Inc. with $44 million; and Nucleonics Inc. with $40.9 million.

Rounding out the Top 10 were OptionsXpress, Cornice Inc., which provides storage solutions for portable consumer devices, and CipherTrust Inc., a provider of email protection technologies.

Sequoia Capital, which last year closed its 11th fund with $400 million, was the quarter’s most active firm. It made 18 investments, including deals with Ikanos Communications Inc., Open-Silicon Inc., Sourcefire Inc. and NetScaler Inc.

Menlo Ventures was next up with 16 deals, followed by 14 deals apiece by Alta Partners and New Enterprise Associates (NEA).

Per usual, most VC investments were made in expansion-stage companies, with $2.43 billion going into 278 deals. Northern California led the geographical charts with over 30% of the national disbursement flow, followed by New England with nearly 16% and Southern California with about 10 percent.

Fund-Raising Dips

The venture industry also took a Q1 fund-raising hit, with 32 firms raising $2.3 billion, according to Thomson VE and the NVCA. The figures only include funds from U.S.-based firms and exclude money raised by funds-of-funds and secondary funds.

This is the 12th straight quarter that Q1 fund-raising totals have decreased from the preceding fourth quarter. The average drop since 1993 has been 46.4%, although the Q1 2004 tally was 57.4% less than the $5.41 billion raised by 50 VC firms in Q4.

The primary explanation for this trend is that many institutional investors desire a year-end close for internal allocation reasons. NEA, for example, held a $1 billion first close at the end of December then held a final close on its $1.1 billion fund in January.

Historically, second-quarter numbers reflect a fund-raising rebound. And there is every reason to expect the same this time around.

After all, dozens of VC firms are raising new vehicles and many already have a surplus of limited partner commitments. Benchmark Capital, for instance, has said it will hold a first and final close on a $400 million fund in June (see story, page tk).

Also on the fund-raising trail is a large group of emerging fund managers. This includes new teams cobbled together by former general partners with brand-name venture shops.

Seven of the 32 funds to raise capital in the first quarter of 2004 were first-time funds.

The first-timers include Accuitive Medical Ventures of Duluth, Ga.; MicroVest Capital Management of Bethesda, Md.; Ivy Capital Partners of Montvale, N.J.; and Flywheel Ventures of Menlo Park, Calif.

The quarter’s top fund-raiser was far from a newbie. San Francisco’s Alta Partners raised a total of $407 million for two funds. It raised $227.6 million for its third biopharmaceutical fund, which eventually closed at $300 million, and it pulled in another $180 million for its fourth general fund (see chart, below).

The second-largest fund-raiser was Essex Woodlands Health Ventures of Chicago, which raked in $400 million for its sixth fund, followed by De Novo Ventures of Menlo Park, Calif., which pulled in $250 million for its second fund.

Menlo Park’s Kleiner Perkins Caufield & Byers raised the first $182 million of its 11th vehicle in the first quarter, then held a final close on $400 million in the last week of April (see Fund Profile, page 18).

While fund-raising for venture funds declined in Q1, it was the opposite for funds-of-funds. A total of 21 FoFs closed on new capital last quarter, for a net take of $3.51 billion, which represents a 50% gain over the $2.34 billion raised by 17 funds-of-funds in the fourth quarter.

Leading the way for FoFs was HarbourVest Partners of Boston, which closed on a pair of $2 billion funds last quarter. A combined $1.5 billion of that tally was committed in Q1, including $996 million for a buyouts-focused vehicle, and another $152 million for a venture capital-focused fund.

Other significant FoF fund-raisers in Q1 were Chicago’s Adams Street Partners, with a combined $924 million for a pair of funds, New York’s Citigroup Private Equity Partners, with $275 million, and FLAG Venture Partners of Stamford, Conn., with $271.3 million for its fifth FoF.

Like their venture brethren, buyout shops also came up with less money in Q1 than they did in the prior quarter. A total of 31 buyout and mezzanine funds raised $2.37 billion in the quarter, down sharply from the $15.32 billion raised by 50 funds in Q4.

Email: daniel.primack@thomson.com