Fund-Raising Heats Up After Tepid Q1, More First-Timers Emerge –

Venture capital fund-raising volume looks poised to rebound in the second quarter after disappointing Q1 results. Domestic VC firms closed on more than $3.3 billion for new funds between April 1 and May 16, which already accounts for more than half of the total raised in the first quarter.

More than half a dozen firms have closed on funds since the start of April:

* Austin Ventures was expected to hold a final close on $525 million in May. It had already locked up $416 million as of April, and had originally been targeting a March 31 close. It is maintaining its decision to not accept LP commitments from Texas-based public institutions, although it will accept public money from states such as Virginia, Michigan and Massachusetts.

* Benchmark Capital raised $250 million for its second fund targeting Israel-based technology companies. The Silicon Valley firm’s first Israel-focused fund, raised in 2001, was $10 million smaller.

* Canaan Partners sewed up $450 million for the seventh fund in its 18-year history. The early stage IT and life sciences investor has offices in Rowayton, Conn., and Menlo Park, Calif.

* Frazier Healthcare Ventures of Seattle held a final close on $454 million for its fifth fund.

* IDG Ventures Boston closed on an oversubscribed fund of $180 million, becoming the first IDG-affiliated venture group to raise outside capital. Its West Coast sister fund currently is in the midst of marketing its own third-party vehicle.

* Menlo Ventures wrapped up $1.2 billion for its 10th fund, about $200 million more than the 29-year-old firm set out to raise.

* Split Rock Partners of Minneapolis, one of the two firms that emerged from the breakup of St. Paul Venture Capital, raised $275 million. The other SPVC offshoot-Vesbridge Partners-is in the mid-marketing stage of an inaugural fund focused on early-stage networking and IT infrastructure companies. Both groups have LP commitments from former parent St. Paul Travelers.

What is particularly interesting about the Q2 crop is that its members do not have any unifying characteristics. For almost every firm targeting the new VC sweet spot of $250 million (i.e., Benchmark Capital Israel and Vesbridge Partners), there seems to be another looking to push the mega-fund mark of $1 billion (i.e., Menlo Ventures and VantagePoint Venture Partners). And for every veteran firm in market (i.e., Canaan Partners and Morgenthaler Ventures), there is an emerging manager trying to get noticed (i.e., Agenda Capital from NEA pro Stewart Alsop and Spark Capital from former Battery Ventures and Charles River Ventures partners).

In fact, the only commonality seems to be that LPs are willing to subscribe, and then oversubscribe in U.S.-based funds. Most closed funds in both Q1 and Q2 have some level of oversubscription, due to an increase in LP capital availability and the sizable percentage of VC firms that raised funds in late 2004. As one limited partner said: “The due diligence threshold is still there, but it seems a bit easier to get over right now because GPs have so many funding options.”

Even Asian investors like their chances in the United States. Allen Miner, the founder of Oracle Japan and Japan’s SunBridge Partners, is out trying to raise $100 million. He has partnered with three principals from Equitek capital to raise his third SunBridge fund, which will make U.S. investments.

Hindsight

Looking back on the first quarter, just 46 U.S.-based venture firms raised $4.95 billion in Q1, down 19% from the $6.13 billion raised in Q4.

LPs suggest that the Q1 slowdown can be largely attributed to financial reporting requirements that prompted many firms to hold closes by Dec. 31. They say that there will be a Q2 bump, but to expect relatively slow going for the remainder of 2005.

“I don’t think that you’re going to see another second-half increase like you did [in 2004],” says a public pension fund manager who declined to be named. “Definitely in buyouts, but not in venture capital.”

Indeed, the only real problem for today’s fund-raising VCs is in stealing LP attention away from LBO firms. U.S.-based LBO and mezzanine funds raised nearly $15.8 billion in Q1, including significant chunks of new $10.05 billion and $8.5 billion vehicles from The Carlyle Group and Goldman Sachs Capital Partners, respectively.

Moreover, The Blackstone Group is reportedly $2 billion oversubscribed for its current $10 billion offering, and Thomas H. Lee Partners is on record as wanting to raise $7.5 billion. There also are a number of middle-market buyout funds in fund-raising mode, including Charlesbank Capital with an $800 million target, ABS Capital with a $500 million target and MidOcean Partners with a $435 million target.

“The percentage returns of these mega-buyout funds might not be as high as with some of the VC ones, but the cash-weighted returns can’t even be compared,” says the pension manager.

The largest domestic venture capital fund raised in Q1 came from Weston Presidio, which takes this quarter’s “Oak Investment Partners” prize for a VC firm that often acts more like a generalist private equity firm. The Boston-based firm hit its $1 billion target for Fund V on March 31, even though its previous fund was still underwater as of Q3 2004, according to return data made available by CalPERS.

Next up was August Capital, which closed on $533 million of its $550 million fourth fund during Q1. The firm’s CFO, Mark Wilson, says that the final number could end up a bit higher due to straggling side fund commitments.

Shasta Ventures-formed by former investors from New Enterprise Associates, Trinity Ventures and Battery Ventures-was Q1’s most successful first-time fund, with $210 million in commitments. It was followed by Ceres Venture Partners (the legal name for the former health care investment team of Sprout Group), which raised $155 million.

Additional reporting by Jerry Borrell and Constance Loizos.

Email: daniel.primack@thomson.com