Increase in Q2 Deals Suggests Worst Has Passed –

After a long downturn, the venture industry finally showed signs of life in the second quarter. The biggest news was that VC disbursements increased for the first time since 2000. On a less dramatic but still upbeat note, venture fund-raising increased over the previous quarter.

An official reversal of financial fortune requires two straight quarters of growth, so it may be too early for venture capitalists to say that VC deal volume and fund-raising have bottomed out. On the other hand, such official pronouncements may be just one quarter away.

New data released in July shows that more venture capital was disbursed into U.S.-based companies between April and June than between January and March. This represents the first quarter-over-quarter increase in three years, and is being signaled by some as the beginning of the VC market’s long-awaited rebound.

“If you look at these numbers, you’d probably conclude that the market has bottomed out,” says Todd Dagres, a general partner with Battery Ventures. “I think this is also true if you look at the macro environment, like the NASDAQ and general attitudes toward the economy.”

Overall, 669 U.S.-based companies raised a total of $4.28 billion during the second quarter, according to the PwC/Thomson VE/NVCA Money Tree Survey. The rise represents a significant bump over the $4.04 billion raised for 647 companies during the first quarter.

The last time venture investments rose quarter-over-quarter was all the way back in the first quarter of 2001. At that time, VCs put $28.61 billion to work, 20% more than the previous quarter. The new numbers obviously don’t come close to meeting such lofty peaks, but they nonetheless indicate that the slowdown may be over.

“I think that activity is picking up, particularly in the early-stage IT sector that we focus on,” says Jon Callaghan, managing director with Globespan Capital Partners. “I’m not sure whether we’ve passed the bottom or are just rolling around down there, but I still think that this low level is a healthy level.”

The second quarter’s biggest winner was WildBlue Communications, an Englewood, Colo.-based provider of broadband multi-connection services. It raised $156 million. (The deal was announced in December 2002, but regulatory restrictions prevented a final close until this past April.) Next up was InPhonic Inc., a Washington-based wireless and data distribution company that secured $56 million from sole investor Technology Crossover Ventures. Rounding out the top five were Hawthorne, N.Y.-based Acorda Therapeutics Inc., which pulled in $55.27 million, San Diego-based Santarus Inc., which secured $52.4 million, and New Haven, Conn.-based Rib-X Pharmaceuticals Inc., which nabbed $51 million.

News that venture capital fund-raising rose was greeted with cautious optimism by many venture capitalists, including those who are pitching new funds to potential limited partners. “It’s reassuring to know that someone is committing to venture funds right now,” says an early-stage investor who requested anonymity. “LPs seem to have been very stingy with their money, but maybe this means they’re willing to open up the purse-strings a bit.”

The new figures from Thomson VE and the NVCA show that 32 U.S.-based venture funds took in $1.63 billion in gross commitments in the second quarter. That’s a 25% increase from the $1.22 billion raised by 28 U.S.-based firms in the first quarter.

Most of the increase is attributable to $395 million in new commitments for the eleventh fund raised by Sequoia Capital. Among the other fund-raising winners were the Edgewater Funds, which secured $196 million for its fourth late-stage fund, Lighthouse Capital Partners, which raised $178 million of its $366 million fifth fund, and Valhalla Partners, which netted a $108 million first close on its inaugural effort.

Notably absent from the quarterly tally is ComVentures, which had been hoping for a June close on its $350 million-targeted sixth fund. Sources say that the firm postponed its final close until later this year after several previous investors declined to participate in the new offering.

Going forward, it seems almost certain that overall fund-raising numbers will continue to rise. Not only should firms like ComVentures and Alta Partners hold final closes on new vehicles, but also New Enterprise Associates (NEA) has started raising its eleventh fund with a $1 billion target. If successful, the new NEA offering would come in around 56% smaller than its predecessor. Nonetheless, it would be the first venture fund to raise at least $1 billion in more than two years.

“The cap will probably be a bit more than $1 billion, although we’d certainly be happy to meet our target,” says Nancy Dorman, a Baltimore-based administrative general partner with NEA. “We’ll probably hold a first close in November.”

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