New Funds and Deals Creep Along in Q3 –

When an industry is flush with cash and exits are nowhere in sight, it’s actually a little surprising that any new funds are being raised or brand new deals are getting done at all. So, to the surprise of no one, venture capital fund-raising and disbursements continued at a tepid pace in the third quarter of this year.

Thirty-four venture firms raised a gross total of $1.68 billion during Q3, which represented a 19% drop from the previous quarter, according to Thomson Venture Economics (publisher of VCJ) and the National Venture Capital Association (NVCA).

If you look at the numbers another way, veteran fund-raisers can take some solace: Of the total number of funds, 27 were follow-on vehicles-five more than were raised in the second quarter and just four shy of the number raised in the first quarter. The message: If you can show good returns to your LPs, they’ll come back for your next fund.

The only increase between July and September was in net fund-raising totals, which factor in capital removed from the market due to fund cuts. During Q2, so many capital commitments were canceled ($2.73 billion by seven firms) that the quarter’s net take actually veered into negative territory. In Q3, the net total was more than 340% higher than in Q2, as just one firm-BRM Capital-reduced its fund size.

One of the quarter’s biggest winners was Boston-based Schroder Ventures Life Sciences, which held a $150 million second close on its new $400 million fund. The vehicle, Schroder Ventures International Life Sciences III, expects to invest in biotech and health-related companies in all stages of their life cycles. Since raising its first fund in 1994, Schroder has invested about 22% of its capital in early-stage companies.

“It’s tough [raising a fund] right now, because the regular sources of capital have a lot of pressures being put on them irrespective of what’s happening in the private equity market,” says James Garvey, managing general partner with Schroder. “One of the things that I think has helped us, though, is that people are still interested in health care-focused funds.”

Other firms that raised more than $100 million were Adams Street Partners, which closed on $148.5 million for its planned $300 million Adams Street V LP, and Sofinnova Ventures, which closed on $110 million for its planned $250 million Sofinnova Venture Partners VI LP.

Firms that raised at least $50 million in Q3 included Labrador Ventures ($90 million), Edison Venture Fund ($65.8 million), Walker Investment Fund ($66.5 million) and Venture Capital Fund of New England ($50.1 million).

Deals Go Down

Like the fund-raising numbers, the number of deals done by venture firms declined in the third quarter, according to a survey done by PricewaterhouseCoopers, Thomson Venture Economics and the NVCA. It marked the 10th straight quarter that less capital was committed to U.S.-based companies and the ninth out of the last 10 in which fewer companies received funding.

Between July and September, 647 companies raised $4.45 billion, a 25% drop from the $6.01 billion pumped into 838 companies in Q2. Compared to the third quarter of last year, investments in Q3 of this year fell 49% from the $8.68 billion raised by 1,085 companies.

“Venture capitalists have concerns regarding the front end and back end of the deals they are evaluating,” says Mark Heesen, president of the NVCA. “On the front end, they are concerned that young companies are going to have difficulty gaining traction in terms of customers and revenue, due to the decline in technology spending. On the back end, they are concerned about sobering valuations and illiquidity. Both sets of concerns are resulting in an increasingly cautious venture community.”

Overall, investors were most likely to invest in expansion-stage deals, a segment that received 57% of all committed capital and accounted for 56% of all deals in Q3. These percentages were relatively similar to what was seen in Q2, as was the same for early- and seed-stage deals. The only real gainers were late-stage plays, which represented 20% of all committed capital in Q3, after making up just 13% in Q2. Late-stage deals also provided the largest per-deal capital average with $9.67 million.

The largest round of the quarter went to NuVox Communications Inc., a communications services provider formerly known as Gabriel Communications Inc. (see chart, page 10).

The Chesterfield, Mo.-based company secured $66 million in its fifth round of funding from prior investors that included JPMorgan Partners, Goldman Sachs, Norwest Equity Partners and Whitney & Co. Not all was rosy for NuVox. Its Series D post-money valuation of $444.9 million-established in September 2001-fell to $97.65 million for the new round, which closed in August.

The second-largest round of the quarter was garnered by Exigen Inc., a San Francisco-based automation software company. It netted $62 million in its first round of institutional funding in July. Lightspeed Venture Partners led the deal, and it was joined by Focus Ventures.

The quarter’s most active investor was U.S. Venture Partners (see chart, left), which pumped $52.6 million into 16 companies, such as MicroVention Inc., DiTrans Corp. and BitBlitz Communications.

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