Little to Celebrate with Uptick in Q3 Fund-Raising

It was easy to try to put a brave face on this morning’s venture fund-raising figures.

The third quarter money hunt brought $3 billion to 51 45 U.S.-based venture funds, according to the National Venture Capital Association and Thomson Reuters (publisher of his blog).  That was a 40 percent increase from the second quarter and a 29 percent increase from Q3 2009.

But there is little to rejoice when you look further back at the historical numbers (see table below). For example, U.S.-based venture firms raised $8.4 billion in the third quarter of 2008, the last somewhat normal year before the economic crisis.

The third quarter of this year would have looked far worse without a white horse: a $750 million fund raised by Institutional Venture Partners.

VCs appear resigned that fund-raising is going to be difficult for some time. “With fund sizes getting smaller and fewer firms raising money, we are experiencing a period of time in which venture capital investment is consistently outpacing fund-raising, creating an industry that will be considerably smaller in the next decade,” NVCA President Mark Heesen said in a prepared statement.

I can’t argue with that assessment, but then Heesen says: “[M]ost venture capitalists and their limited partners believe that this environment will drive future returns upward without harming innovation and job creation.”

I’m not sure I follow that last point. Here are the results of a survey released this morning from the law firm DLA Piper. Nearly 64 percent of VCs, entrepreneurs and tech executives surveyed believe the IPO market won’t return to the pace of the 1990s or early 2000. No surprise here. As a result, 59 percent see the traditional venture capital model as “permanently altered,” with fewer firms and funded companies in the future.

If fewer companies are funded, how can job creation and innovation remain unaffected? “If there is a long-term expectation that the IPO market will not rebound, that means a reduction in the number of dramatic home runs for venture capital investors and lower returns overall,” Peter Astiz, global co-head of the technology sector at DLA Piper, said in a prepared statement.

It doesn’t seem you can have it both ways: smaller funds and more innovation. I’ll leave it to you to decide.