Labrador splashed with cold water

LPs won’t be receiving any calls from Labrador Ventures any time soon.

Similar to a bunch of other venture firms facing a shuttered IPO market, a sluggish M&A market and cash-strapped institutional investors, the Palo Alto, Calif.-based seed stage investor is holding off on raising a new fund.

“Labrador is not currently raising a fund while working for exits from fund five, our 2004 vintage fund,” Partner Larry Kubal said via email. “The exit market, or lack thereof, has lengthened the road from early stage investment to exit. The prospects look great for fund five, and we want realized winners before we raise for a sixth fund, particularly given the current economic environment.”

Labrador began raising its fifth fund in 2002, with an initial target of $150 million. It closed the fund two years later with $90 million, much of which has already been committed to 33 companies, including Pandora, a music discovery website, Shot Spotter, a maker of gunshot-location technology, and M15, which makes anti-spyware security appliances.

It’s a portfolio that Kubal calls “spectacular, likely [one that will result] in our best fund to date.”

Labrador needs the hits. Though the firm never entered formal “fund-raising mode,” Kubal says that he and his partners spoke with a number of friendly current and interested LPs to test the waters, and concluded that now is not the time to raise a new fund.

“The internal consensus was to not get distracted in a tough fund-raising environment when we did not have major exits from the current fund,” he says.

No doubt Labrador’s decision will resonate with its peers, many of whom are also finding it hard to raise money right now.

Venture funds raised $3.4 billion in the fourth quarter of last year, down from 8.4 billion in the third quarter, and way down from the $11.7 billion that they raised in the fourth quarter of 2007, according to the National Venture Capital Association, based on data from Thomson Reuters (publisher of VCJ).

Even firms that have managed to close funds are collecting far fewer capital commitments than hoped for. Boston-based Atlas Venture, for example, recently closed its eighth fund at $283 million, well below its $500 million target and the $385 million it raised for its seventh fund in 2006.

Not only is the global economy in a tailspin, but the last decade has been notable for the shortage of liquidity events for venture firms.

The internal consensus was to not get distracted in a tough fund-raising environment when we did not have major exits from the current fund.

Larry Kubal

For example, between Labrador’s fifth fund and its fourth, which closed with $90 million in 1999, not one of its portfolio companies has gone public. Of the six companies in its current portfolio that have been acquired or merged, most of the payoffs have been nominal. Chat startup Proficient Systems raised $21.8 million in total funding from Labrador, Kinetic Ventures and others before selling for $17 million in stock from from LivePerson in 2006.

In 2003, infrastructure software startup Atesto Technologies, which raised $18 million from Labrador, Draper Richards and others, sold its intellectual property for an undisclosed amount to a French company, then closed its doors.

Other Labrador exits include Wi-Fi networking software company NextHop Technologies, which raised $40 million from Labrador, New Enterprise Associates and numerous others, then sold to U4EA Technologies for an undisclosed amount last year; security software developer Greenborder Technologies, which raised $24.6 million from Labrador, Sevin Rosen Funds and others, then sold to Google in 2007 for an undisclosed amount; and MeeVee, a video search service that raised $27 million from Labrador, Defta Partners, WaldenVC and others, then sold in 2007 to Live Universe for an undisclosed amount.

Recent performance notwithstanding, 20-year-old Labrador has enjoyed some home runs. The firm was an investor in the application monitoring company Jareva, which raised $23 million from seven venture firms before being acquired by Veritas Software Corp. in 2002 for $537 million.

Labrador also backed hardware and software startup InfoGear, acquired by Cisco Systems in 2000 for $300 million in stock after raising $26.8 million from 13 firms. And Labrador, along with three other firms, invested alongside Draper Fisher Jurvetson in Web-based email startup Hotmail. That company raised just $9 million before Microsoft acquired it for about $400 million in 1998.

Labrador Ventures is managed by Kubal, once a management consultant at Booz Allen & Hamilton, Stuart Davidson, who previously worked for MCI Communications and Warner Communications, and Sean Foote, previously a management consultant at Boston Consulting Group. —Constance LoizosDEALWATCH: Five recent investments by Labrador VenturesEveryone.net Inc._Outsourced email solutions for business and individuals

Fyreball Inc._Gaming-influenced alternative to email

Integrated Materials Inc._Poly silicon furnaceware products

Podaddies Inc._Video advertising solutions

Transpera Inc._Platform to monetize Web video on mobile phones

Note: Investments made between Oct. 6 and Dec. 19, 2008. Sources: Thomson Reuters