Q1 recap: Tepid fund-raising no cause for concern

Venture capital fund-raising plodded along in the first three months of the year, hitting its lowest level since the first quarter of 2004.

As bad as that sounds, VCs aren’t the slightest bit worried. They say the decline has nothing to do with a diminishing appetite for VC among limited partners. Instead, it is just a reflection of the smaller funds that most firms are raising.

“We’re a flea on the back of an elephant,” says Dixon Doll of DCM-Doll Capital Management. “There’s a tremendously larger amount of capital that would like to go to well-managed firms with a track record.”

The official Q1 tally from Thomson Financial (publisher of VCJ) and the National Venture Capital Association shows 56 funds raised $4.6 billion. Those numbers were up from the prior quarter but down significantly from year-ago levels, when venture funds raised $6.6 billion.

“As far as the fund-raising market for capital, things are at a pretty steady state,” says Kelly DePonte, a partner with Probitas Partners, a San Francisco-based placement agency. “There hasn’t been a surge; there hasn’t been a dramatic decline.”

If he were to describe the fund-raising climate in a single word, DePonte says that it would be “sustainable.” Particularly in early stage funding, there’s only so much money the market can deploy well. From that perspective, he says, a surge in fund-raising “would probably be bad news.”

We’re a flea on the back of an elephant. There’s a tremendously larger amount of capital that would like to go to well-managed firms with a track record.”

Dixon Doll, Founder, DCM-Doll Capital Management

Relatively flat investment levels for venture funds contrast sharply with the buyouts industry, where firms have been raising record sums. But the influx of money to non-venture private equity classes could be advantageous to VCs, says Kate Mitchell, a managing partner at Scale Venture Partners. She points to concerns among institutional investors about a potential buyout bubble. Moreover, the venture industry’s capital needs are miniscule in comparison to the buyout sector.

Lords of discipline

Chad Waite, a general partner at OVP Venture Partners, which recently closed a seventh fund for $250 million, says he believes venture investors are following a more conservative approach to fund-raising than they have in past years. “They are much more disciplined in the amount of money they take,” he says. In terms of the appetite among limited partners, Waite says he considers the last two years to have been an “up cycle” for venture fund-raising.

Several name-brand firms closed big funds during the quarter, including MPM Capital (which raised $550 million in the quarter), Venrock Associates ($528 million), MissionPoint Capital Partners ($335 million) and Charles River Ventures ($285 million).

Draper Fisher Jurvetson—the quarter’s third largest fund-raiser, raising more than $400 million—officially reached its $600 million target for fund IX in early April, according to a regulatory filing, although one LP source says the fund may reach $620 million.

MPM’s closing was a long time in the making. Its MPM BioVentures IV fund made its first investment in June 2006 and has been raising money for more than a year. Returning LPs GE Healthcare Financial Services, Itochu Corp., the Kauffman Foundation and the Scottish Widows Investment Partnership provided more than half the committed capital, according to MPM.

Newcomer MissionPoint, which is based in Norwalk, Conn., plans to make private equity investments in the clean energy and environmental finance sectors. The firm targets initial investments of $10 million to $30 million, focusing on expansion-stage financing, management buyouts and corporate joint ventures. It lists one portfolio company on its website, solar energy service provider SunEdison. The firm is chaired by Mark Schwartz, former president and CEO of Soros Fund Management.

Venture funds are much more disciplined in the amount of money they take.”

Chad Waite, General Partner, OVP Venture Partners

CRV’s closing of its 13th fund brings the 37-year-old firm’s total capital under management to about $2.1 billion. With the new fund, CRV will continue to invest in early stage technology ventures, spanning software and services, media, communications and data center infrastructure.

Venture funds in the first quarter collectively raised 19.5% more than those in the fourth quarter of 2006, when 56 funds took in $4.1 billion in commitments.

Fund-raising rates would almost certainly have been higher during the quarter, DePonte says, if venture capital firms with strong track records had sought larger sums. Today, he says, limited partners commonly find they cannot get in on hot new funds unless they have invested with the managing firm previously.

But while established firms find fund-raising “relatively simple,” newcomers face a different reality, says industry veteran Doll.

“Our model has never scaled,” he notes. “It’s not that easy for brand-new startup firms to lay out their shingle and raise lots and lots of capital.”