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Investments in U.S. venture capital funds plunge
October 12, 2009 / 6:47 PM / in 8 years

Investments in U.S. venture capital funds plunge

SAN FRANCISCO (Reuters) - Disappointed investors who threatened to abandon venture capital have carried through, sending the number of new funds tumbling and signaling a smaller industry with fewer venture capitalists.

In the first three quarters of this year, only 86 U.S. funds raised money, according to data compiled by the Venture Capital Journal and the National Venture Capital Association

It the trend is maintained, by year’s end there will be somewhere between 104 and 118 new funds.

By comparison, even in the blackest days of the dot-com bust of 2001, investors averaged 234 funds a year.

“You are going to see a reduction in the number of firms, but more important you will see a reduction in the number of venture capital professionals,” Mark Heesen, president of the National Venture Capital Association, said in an interview.

Venture capital firms stay in business by raising funds and investing the money over a period of five to 10 years to start-up companies.

Venture capitalists make money for investors when and if start-ups are sold for a high price or go public. But returns, on average, have been poor for years and investors seem to have finally said “enough.”

Investors “by necessity are dialing back on the money they are putting into all alternative assets,” said Heesen.

LOWERED EXPECTATIONS

Even some of this year’s celebrated successes had trouble along the way.

Khosla Ventures announced in September it had raised more than $1 billion for two funds that will invest in clean tech and information technology.

But Venture Capital Journal reported those efforts took an unusually long time and had been in the works since at least June 2008. In the same month the Westly Group said it had finally hit its goal.

“Our goal was to raise $100 million despite a historically challenging financial market,” said Steve Westly, after working more than a year to raise funds. “We will exceed that goal.”

The fund had told government regulators its initial goal was $130 million, according to VCJ.

Earlier this year the magazine listed 16 other firms that cut their targets, delayed, or gave up fund raising.

Data from Dow Jones Private Equity Analyst tells a similar story. Venture capital firms raised $8 billion in 83 funds, less than half the $18.9 billion raised by 141 funds in the same period last year.

Dow said investors favor early stage funds, which can take seven years to mature and cost less than late stage firms. Investors have been discouraged by the failure of private companies to go public or win rich acquisition deals -- known as “exits.”

“Exit numbers are not winning over limited partners who are steering clear of later-stage funds,” said Jennifer Rossa, managing editor of Dow Jones Private Equity Analyst.

Reporting by David Lawsky; Editing by Tim Dobbyn

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