Fund-Raising Soars 78%, Momentum Builds –

Venture firms raised more capital through the first three quarters of this year than in all of 2003, according to Thomson Venture Economics (publisher of VCJ) and the National Venture Capital Association (NVCA).

In all, 125 venture funds took in nearly $11.25 billion in commitments through Sept. 30, 2004, compared to $10.5 billion raised by 134 funds in all of 2003. And the number is expected to grow in Q4. Ignition Partners and U.S. Venture Partners closed on a combined $900 million in the final week of October, while Accel Partners, Austin Ventures and others were on the fund-raising trail.

“There is a lot of interest out there, so the supply doesn’t seem to be slackening,” says Kelly DePonte, a partner with fund placement agent Probitas Partners. “I don’t think we’re going to have the outrageous peak we had in 2000, but that may only be because general partners are displaying discipline by raising 50% or less than they did with their last fund. The limited partners, though, are rushing wildly all over the place, which means that some VCs are getting funded even though they shouldn’t be.”

In the third quarter, 46 venture firms raised just over $5.5 billion, which represents a 78% increase over the $3.1 billion raised in the second quarter. Leading the way was Oak Investment Partners (a private equity firm that does venture deals), which raised about $1.55 billion for its eleventh fund. Also holding major Q3 closes were InterWest Partners with $600 million, Battery Ventures with $450 million, Ferrer Freeman & Co. with $385 million and Benchmark Capital with $375 million.

It is important to note that the Thomson VE and NVCA numbers only include capital committed during the quarter itself. ATA Ventures, for example, closed on the final $80 million of an inaugural fund that now stands at $145 million. Other notable first-timers included QuakerBioVentures with $100 million of its $280 million inaugural fund, Hopewell Ventures with $63.3 million ($100 million to date), Delta Russia Partners with $58.7 million, and Accuitive Medical Ventures with $18.6 million ($53.6 million to date).

All of this activity, of course, has had some unintended consequences. Not only are some undeserving funds getting raised, but general partners are beginning to push the envelop on partnership terms.

Accel, for instance, in November closed on a $400 million fund that features a 30% carried-interest structure. Even buyout firms are getting into the act, with Boston-based ABRY Partners nearing a $950 million close for a media-focused fund that also includes a 30% carry.

“It is surprising to see firms getting premium carries again, but I’d rather have them raise the carry and keep fund sizes reasonable, than the other way around,” says Glen Holland, a director with Schott Capital. “It was just last year that GPs were having to make concessions on terms. That has changed quickly.”

Both DePonte and Holland expect that VC fund-raising activity will continue on its torrid pace through Q4, and well into next year. They also say to keep an eye on the ever-expanding LBO market, which saw more than $14 billion in fund-raising during Q3, a 9.4% dip from the $15.7 billion raised in the second quarter. Among the major buyout firms coming to market are The Carlyle Group with a $5 billion fund, Clayton, Dubilier & Rice with a $3.5 billion fund, and Warburg Pincus with a proposed $8 billion global offering.