Venture capital funds shrink to 13-year low

SAN FRANCISCO (Reuters) - The number of venture capital funds raising money in the second quarter fell to just 25, the lowest in 13 years, as investors continue to shun the troubled sector, the industry's trade association said on Monday.

The National Venture Capital Association said the amount committed to those 25 funds plummeted to $1.7 billion, the lowest since 2003, when $938.1 million was raised. That compares with $4.6 billion committed in the first quarter.

Many venture capitalists may be waiting until 2010 or beyond to reach out to investors, the association added.

"The final manifestations of the bubble burst combined with a troubled exit market make it a very difficult time to raise money," said association president Mark Heeson.

"There will be firms that will not be able to raise a follow-on fund and our industry is positioned to contract over the next five years through this type of attrition."

Venture capitalists set up funds with money from limited partners like universities and pension funds, and invest that money in start-ups.

The size of an individual fund typically varies from $100 million to $300 million, and the idea is that the companies are sold after seven years or more. Recently, venture capitalists have been having trouble finding such exits.

When a venture capital firm is unable to raise new money its disappears very slowly, because existing funds have a 10-year life. Such firms become the walking dead.

In the last few years, limited partners have been vocal in their disappointment with many existing funds, which on average have had no positive returns over the past decade.

Their current lower level investment contrasts with the fourth quarter of 2007, when investors put $12.3 billion in 86 funds.

But venture capitalists say that is no bad thing.

In June, Navin Chaddha of the venture capital firm Mayfield said that the amount of money going into capital needed to shrink in order for good returns to come back.

One of the new firms that did raise money in the last quarter was the newly formed Andreessen-Horowitz company, with two high-profile partners. The company raised $300 million.

In an interview with Reuters, Marc Andreessen recently expressed the view that more than half of the more than 700 existing funds would disappear and he, like Chaddha, applauded that.

"That's what should happen," he said. "It's not just that there are 400 extra venture funds. It's that they are funding 4,000 extra companies, none of which will ever amount to something."

(Reporting by David Lawsky; Editing by Steve Orlofsky)