The second quarter of 2002 goes down in history as the first time that venture funds refunded more money to limited partners than they raised.
The trend officially began in January, but it didn’t reach critical mass until May, when firms like Accel Partners, Austin Ventures and Charles River Ventures began chopping their funds by more than $500 million apiece.
While there were a number of factors driving the refund trend, the most easily identifiable was self-interest. More specifically, vintage year 1999 and 2000 vehicles are almost all under water, and GPs want to move on to their next funds as soon as possible. By cutting fund sizes, they have less money to invest from their present funds and, theoretically, they will generate goodwill among LPs that have been stung by poor returns.
How poor? The average U.S.-based venture capital fund has a one-year pooled IRR of -24.4%, according to second-quarter performance numbers released with the fund-raising data by Venture Economics (publisher of VCJ), the National Venture Capital Association and PricewaterhouseCoopers. The damage is especially severe among early-stage/seed funds, which have a one-year pooled IRR of -31.8%. While the numbers for three-year returns are in the black, it is equally important to recognize that those figures do not include the July public markets’ swoon.
The second quarter wasn’t all doom and gloom. U.S.-based venture capital firms raised $1.8 billion, a 5% jump from the $1.7 billion raised by 44 firms during the same period in 2001. Some funds, like fund-of-funds Abbott Capital Management, were oversubscribed. FoFs aren’t included in Venture Economics fund-raising numbers, since their capital is ultimately counted when they invest it in direct investors. But Abbott’s experience indicates that institutions are still interested in venture investments. “We’re still seeing new people coming into the asset class,” says Charlie van Horne, a managing director at Abbott. Abbott’s fund held its final close in July.
While Abbott managed to close oversubscribed, it must have had the private equity gods on its side. It was one of just five fund of funds raised in the second quarter, down from 21 in the same period last year.
Traditional venture funds didn’t fare much better. Just 30 funds were raised in the second quarter, down from 92 in the same period a year earlier. And of the funds that were raised, only 11 were new. A year earlier, 27 brand new funds were raised.-D.P./D.F.