Disbursments Continue Yo-Yo Pattern, Gain Slightly in Q2 –

Quarterly venture capital disbursements have come to resemble the 2004 Boston Red Sox: no winning streaks, no losing streaks.

It’s been this way for a year now, with a yo-yo string of mediocrity that some would prefer to characterize as stabilization. Down in Q3 2003, up in Q4 2003, down in Q1 2004 and, according to new data released today, up in Q2 2004.

The most recent tally represents a net increase of 15.7% over Q2 2003, but a 13.4% decrease from Q2 2002.

In all, 760 U.S.-based companies raised about $5.52 billion between April and June of this year, according to MoneyTree Survey data compiled by PricewaterhouseCoopers, Thomson Venture Economics (publisher of PE Week) and the National Venture Capital Association. It is the third straight quarter that disbursement levels were above the $5 billion mark, although still a drop from the $6 billion-plus totals raised in early 2002.

“I think one reason that the data seems kind of flat is that due diligence is taking a very long time – more on the financial side than the legal side – and some investors are pushing deals off until the following quarter so that they can see one more quarter of financial information,” says Michael Kendall, a partner with Goodwin Proctor LLC. “Our pipeline is jammed with these deals, and we’re hiring more lawyers as fast as we can get them because all of our clients are taking up more of our time.”

The vast majority of second quarter deals came from the information technology space, which led all industry sectors with a 64.9% total. Life sciences continued its slow climb with 28.17%, while non-high-tech took a tumble down to just 6.93 percent.

Force 10 from Milpitas

The quarter’s largest deal also came from the IT sector, as Milpitas, Calif.-based Force 10 Networks Inc. secured $74.9 million in Series D funding. The deal held three closings during Q2, including the conversion of $13 million in bridge financing from the previous quarter. Meritech Capital Partners and Morgenthaler Ventures co-led the deal, and were joined by fellow new investor Crosslink Capital. Return backers included U.S. Venture Partners, New Enterprise Associates and Worldview Technology Partners.

Information technology companies also took the second and third spots, as Mahi Networks Inc. and TechTarget.com Inc. raised $70.1 million and $70 million, respectively. The rest of the top deals – which includes a three-way tie for 10th place (see chart, opposite page) – included six pharmaceutical companies, two wireless technology companies and an acute-care hospital operator.

New Enterprise Associates invested in 24 deals during the quarter, which easily ranks the bi-coastal firm as the quarter’s busiest firm. Among its investments were return plays with Force10 Networks and Hospital Partners of America Inc., which raised $55 million.

Following up as the most-active VC was U.S. Venture Partners with 16 deals, Morgenthaler Ventures with 15 deals and Polaris Venture Partners and Draper Fisher Jurvetson with 14 deals each.

Funds Perk Up

Venture capital fund-raising volume experienced a modest increase during Q2, according to data compiled by Thomson Venture Economics (publisher of VCJ) and the National Venture Capital Association.

A total of 48 firms raised just over $3 billion from April 1 to May 31, compared to 39 funds that raised $2.6 billion during the same period a year ago. The second quarter also barley bested the previous quarter. During Q1, 41 funds raised $2.8 billion.

Combined with Q1 activity, 82 funds have raised more than $5.8 billion during the first six months of this year, compared to 73 funds that raised $3.7 billion during the same six-month period of 2003.

Of the 82 funds to raise capital during the first half of the year, 25 were first-time funds. Among the first-timers were Emergence Capital Partners, which has raised $90 million toward its $100 million inaugural fund. The Burlingame, Calif.-based firm was co-founded last year by Brian Jacobs, previously a partner with St. Paul Venture Capital.

Another notable newcomer to have raised capital during the second quarter was Valhalla Partners, which raised $5 million during the second quarter and now has amassed nearly $180 million for its first fund. The McLean, Va.-based firm-which former New Enterprise Associates General Partner Arthur Marks founded in 2002- set out to raise $200 million.

Just how robust fund-raising will be during the third quarter is anyone’s guess. But if Sevin Rosen Funds is any indication, investors will continue to commit to funds. Sevin Rosen raised $300 million, making it the third largest fund to raise capital during the quarter.

John Jaggers, a general partner with Sevin Rosen since 1988, says that he never before has seen such intense interest from new investors and the firm received more than $600 million in requested commitments from returning LPs alone. The firm, however, stuck to its original target for its ninth fund and cut out all public and fund-of-funds money.

The largest fund raised during the quarter was $400 million Benchmark V, followed by $375 million DCM IV and Sevin Rosen Fund IX. Those three funds were among 21 early stage funds raised during Q2. In all, early stage funds accounted for $1.62 billion of the money raised during the second quarter, or 54% of the total.

“The weight toward early stage funds confirms that limited partners understand the value of long-term investment in emerging spaces,” Mark Heesen, president of the NVCA, said in a prepared statement. He went on to say that, “The lower average size of funds being raised suggestes that the firms are being extremely disciplined in the amount of money they’re willing to accept. Many of these firms could have taken in more money than they ultimately did.”

Email: daniel.primack@thomson.com