VC Fund-Raising Sees Further Shrinkage

Despite a few large fund closings, venture capital fund-raising is on track for a drop in the third quarter.

With just over three weeks left in the quarter, just seven U.S. venture firms have held final closes on funds collectively valued at just under $1.88 billion, according to a preliminary look at the Thomson Reuters data.

Barring some last-minute surge in closing announcements, fund-raising levels will likely be below Q2, during which some 20 firms raised $2.76 billion in commitments for the final closings in their funds (overall Q2 fund-raising activity can be accessed from the NVCA by clicking here).

It’s a sharp drop from just three years ago, when limited partners invested more than $34 billion in venture capital funds. These days, sluggishness in the general economy and negative 10-year returns for the venture asset class overall, among other factors, are causing a broad shrinkage in the venture allocations.

Part of the problem of late has been that investing in a venture fund takes so much diligence for the amount of capital involved, according to Paul Denning, of private equity placement agent Denning & Co.  Major limited partners “don’t feel they can afford the large amount of time involved to put such a small amount of money to work,” he says, particularly for smaller and newer funds.

That’s a shame, he adds, as “there’s an energy building in the venture space both here and abroad that will soon reward people who invest in it.”

Looking at venture stats, it appears that firms that have been around a while are finding it much easier to close. More than a third of this quarter’s total-to-date comes from a single fund–Institutional Venture Partners’  Fund XIII, which raised $750 million for later stage investments in technology and media companies. Partner Todd Chaffee told me last week that the fund came together pretty quickly, in a couple of months, and was oversubscribed.

Other sizeable funds included DCM VI ($400 million), Draper Fisher Jurvetson Fund X ($350 million) and Founders Fund III ($250 million).

The slow fund-raising period comes amid a sluggish interval for exits. Just 12 venture-backed companies have gone public, raising an aggregate $1.13 billion so fr in Q3. In Q2, 17 went public and raised $1.28 billion. A total of 64 venture-backed companies have been acquired so far this quarter, compared to 97 in Q2.