Fund-Raising and Disbursements Continue To Slumber –

Venture capitalists are in a holding pattern, waiting for some kind of economic sign to tell them that’s it’s OK to resume investing and fund-raising at a significant pace.

The latest indicators of their reticence are the fourth-quarter and 2002 disbursement and fund-raising totals released by Venture Economics (publisher of Venture Capital Journal ).

Last year, U.S. venture capital funds raised the lowest gross amount of capital since 1991 and the lowest net amount since 1981. As a group, VCs raised a total of $6.88 billion, but when you subtract the $5.03 billion returned to investors via fund-size reductions, you end up with a net total of $1.85 billion. The total number of funds raised (including funds-of-funds) plummeted from 362 in 2001 to 131 last year.

With the IPO window closed and no real premiums being paid for acquisitions, venture capitalists have very few exit opportunities. So, they’re stuck with bloated portfolios and don’t have the bandwidth to back more startups, particularly early-stage companies that need a lot of care and feeding. It follows that they don’t need to raise additional funds. There is some question now as to whether 2004 will in fact be the next big fund-raising year or whether most venture firms will put off raising new funds till ’05.

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The holiday-laden fourth quarter didn’t help the overall total for 2002. Just 31 funds raised capital during the quarter for a total take of $1.27 billion, down 40% from $2.15 billion for 34 companies the previous quarter and down 77% from the same period in 2001.

No venture fund was able to hit the $1 billion mark in 2002, and there seemed to be little interest in doing so, given that so many billion-dollar funds have ended up refunding money to their limited partners.

Life in Science

The life sciences segment was one of the only fund-raising bright spots. Three of the five largest funds raised last year have a health-care focus. The largest fund-raiser of the year was Boston-based MPM Capital, which closed on $900 million for its BioVentures III fund. The life sciences-focused vehicle closed in December, and lined up such limited partners as the California Public Employees’ Retirement System (CalPERS), Canadian Pension Plan, Danske Private Equity Partners, Itochu Corp. and Winterthur Life & Pensions.

Meanwhile, Healthcare Ventures VII raised $350 million and Schroder Ventures International Life Sciences III pulled in $275 million.

Most of the 2002 fund commitments went to follow-on funds from veteran firms, but a handful of first-time funds managed to take advantage of “emerging fund” allocations from large LPs. Among the pioneering players were 5AM Ventures and Ballast Point Venture Partners.

With venture capitalists raising little new money, they have virtually put the breaks on new deals. Disbursements (or investments) by venture capitalists last year fell to their lowest level since 1997. Nearly 63% of all venture investments went into expansion-stage deals for portfolio companies and another 16.7% into later-stage deals in 2002 (for a total of 79.7%), while early-stage deals accounted for just 19.22% of all disbursements.

“I certainly don’t think that we’ve hit the bottom yet,” says Ollie Curme, a general partner with Wellesley, Mass.-based Battery Ventures. “The IT spending market needs to return before [venture capital investments] increase, and even most optimistic estimates don’t see that happening for at least eight to 12 months.”

No Bottom in Sight

Overall, 3,016 U.S.-based companies raised $21.2 billion of venture capital last year, which represents barely half the $41.3 billion raised by 4,712 companies in 2001. The main culprit seemed to be declining deal sizes, with the average 2002 transaction coming in at $7 million. Moreover, only two companies managed to close $100 million-plus rounds last year, down from 15 such companies in 2001.

Even the supposed big winner of 2002 didn’t really come out on top. That would be Caspian Networks Inc., a San Jose, Calif.-based producer of optical switch technology. It raised $120 million in the year’s largest deal, but its post-money valuation took a major haircut (-80.7%) from its the prior round. The decimated valuation was great for new investors Morgenthaler Ventures and Oak Investment Partners, but lousy for those on both sides of the tide, like Merrill Lynch Capital Partners, New Enterprise Associates and U.S. Venture Partners.

Faring a bit better was Bill Barrett Corp., which was launched last March with a $107.5 million investment at a post-money valuation of $143.75 million from JPMorgan Partners, Goldman Sachs and Warburg Pincus. The Denver-based oil and gas exploration company managed to secure an additional $11 million before the year was through.

Other companies receiving large amounts of venture backing last year include Chiaro Networks Inc. ($80 million), Syndeo Corp. ($75 million), Mahi Networks Inc. ($75 million) and Atrica Inc. ($75 million). WildBlue Communications announced a $156 million venture deal in December, but it is not expected to actually close until the second quarter of this year, pending regulatory approval.

As was the case with fund-raising, the bright spot in new deals was health-care. Most 2002 venture capital disbursements were made into computer-related companies, but the year’s most significant climber was the life sciences sector.

More than one-quarter of all venture dollars went into health care or biotech investments last year, up 34% from 2001 totals. In addition, many of the follow-on life sciences deals managed to avoid valuation routs, with companies like EyeTech Pharmaceuticals Inc. and Insulet Corp. securing new investors without wiping out old ones.

The year’s largest life sciences deal went to Infinity Pharmaceuticals Inc., a Boston-based chemical genomics company that raised $70 million in an oversubscribed Series B funding last June. Advent Venture Partners led the round, followed by HBM Bioventure, Novartis Bioventure Fund, Tallwood Venture Capital, Vulcan Ventures, and others.

Back on the Pharm

The most popular life sciences sector was pharmaceuticals, with a little more than $1 billion pumped into 86 companies last year. Not far behind was biotech, with 101 companies taking in $998 million. Lastly, 97 medical therapeutics companies picked up $936 million.

While overall venture disbursement levels ebb and flow, the geographic dominance of Northern California never seems to be in doubt. The region nabbed 33.8% of all venture dollars last year, with New England coming in a distant second at 12.6%. The other Top 5 geographic winners were Southern California (10.8%), the Southwest (7.5%) and the New York Tri-State region (7.5%).

The busiest venture firm in 2002 was New Enterprise Associates (NEA), which invested in 68 different companies over 73 rounds of funding. Following NEA was Intel Capital, which invested in 56 different companies over 58 rounds of venture funding. (Intel says it actually invested in more than 100 companies, but it declines to reveal the names.) The other big dealmakers were Venrock Associates (50 companies, 62 rounds); U.S. Venture Partners (49 companies, 59 rounds); Draper Fisher Jurvetson (48 companies, 62 rounds); and JPMorgan Partners (45 companies, 47 rounds).