U.S. VC Coffers Overflow with Almost $40 Billion, Average Fund Size Increases to $220 Million –

NEWARK, N.J. – Venture capitalists raked in an unprecedented sum last year, with preliminary fund-raising figures topping $38 billion at press time, according to Venture Economics Information Services, VCJ’s sister company.

VEIS Managing Director Jesse Reyes projects that figure to be in the neighborhood of $42 billion to $43 billion once a final count is complete, a hefty increase from 1998’s $27.6 billion.

Last year’s extraordinary total marks eight consecutive years of fund-raising growth, beginning with $3.6 billion in 1992. It is worth noting that VCs crossed the $10 billion mark for the first time in 1996, raking in $10.6 billion. Fund raising shot up in 1997 to $15.9 billion – yet that is less than half of 1999’s preliminary total.

Despite this pattern of growth, Reyes expects a fund-raising slowdown in 2000 as general partners turn their attention to deals to keep up with the quick decision-making requirements of investing and surviving in “Internet time.” Indeed, VCs have been amassing war chests so they could set aside fund-raising duties to concentrate on adding and building portfolio companies, Reyes said.

As total VC dollars grew in the 1990s, so did average fund sizes. By early January, VEIS had counted 289 fund closings for last year, with an average fund size target of $220 million, up from 1998’s $165 million mean and almost twice 1997’s $115 million average. Last year also saw about a half dozen funds totaling $1 billion or more, including vehicles managed by Benchmark Capital and Oak Investment Partners. Given that kind of scale, Reyes said he would not be surprised to see venture firms investing as much as $250 million into individual companies.

It is safe to say that Bill Miller of Olympic Venture Partners will not be making investments of quite that size. An early stage IT and health-care firm with four general partners, Olympic is launching its fifth fund – with a hard cap of $125 million, almost $100 million less than the VC industry’s average fund size (story, page 26) in keeping with Olympic’s modest size and its strategy of becoming involved with young portfolio companies, Miller explained.

An overall growth in fund sizes helps Olympic because in reduces competition for early-stage deals while assuring the availability of later-round financing for the Washington and Oregon-based firm’s portfolio companies, Miller said.

Given the pace at which Internet companies are built – and the money that demands – and limited partners’ desire to get into venture funds, Miller does not expect to see a decrease in venture fund raising this year.

A small number of venture firms continue to invest in non-IT oriented health-care and retail deals, but the majority of firms that do not focus directly on IT are looking for ways to bring it into their fold, Reyes observed. “Right now, everyone has one hammer, and everything looks like a nail.”

Perhaps, then, Steve Jurvetson, a managing director at Internet-focused firm Draper Fisher Jurvetson, is looking for a bigger hammer. Sounding a lot like Internet evangelist and Kleiner Perkins Caufield & Byers General Partner John Doerr, he argues that the Internet is underfunded.

VCs who look back on previous years’ investments wish they had closed more Internet and tech deals in the past five years, Jurvetson said. At the same time, however, VCs lament that too much money is chasing too few deals.

The problem, he said, is that humans presume a linear rather than a geometric growth path, which is what takes place with the Internet, and he expects available venture capital to be lacking this year relative to the opportunities.