April 7, 2008 / 1:02 PM / 10 years ago

UPDATE 1-Foundation Capital raises $750 million fund

(Adds venture capital fund-raising amount for first quarter; changes dateline from SAN FRANCISCO)

By Anupreeta Das

NEW YORK, April 7 (Reuters) - Foundation Capital, which bet on Netflix (NFLX.O) when the DVD renter was a fledgling company, said on Monday that it had raised its seventh and largest fund at $750 million as investors remain enthusiastic about venture-backed startups amid an economic meltdown.

The latest fund brings the total amount raised by the venture capital firm to around $2.5 billion, said general partner Adam Grosser.

Foundation will devote one-third, or roughly $250 million, of the new fund to backing startups focusing on alternative power, energy efficiency and other clean technologies.

The 13-year-old information technology- and “cleantech”-focused Silicon Valley firm has also backed EnerNOC Inc ENOC.O, one of the few U.S. public energy-efficiency companies.

Grosser said in an interview that Foundation had little trouble raising money despite the roiling markets. “We felt very blessed,” he said.

Venture funding for early-stage funds, which provide initial financing for startups, is a gamble because the companies they back often fail. Still, these investments are less vulnerable to the current market turmoil than large buyout funds are because investors are not expecting short-term returns.

Investors know not to look for returns from Foundation’s newest fund until at least 2012, when market conditions will be different, Grosser said.

In February, Canaan Partners, another big Silicon Valley venture capitalist, raised a $650 million fund.

Venture capital fund-raising rose 29 percent in the first quarter. Some 32 funds raised nearly $5 billion, compared with 22 funds raising $3.8 billion a year earlier, according to Dow Jones data released on Monday.

“With the big buyout funds no longer taking up all the attention of private equity investors, other strategies like venture and mezzanine are gaining ground,” the release said.


Overall U.S. venture fund-raising has been on an upswing since 2002, when 179 funds raised only $4 billion in the wake of the dot-com bubble burst. Last year, 235 U.S. VC firms raised nearly $35 billion, with $11 billion in the fourth quarter alone, according to data from Thomson Financial and the National Venture Capital Association.

But Peter Fenton, a general partner at Benchmark Capital, said large institutional investors such as hedge funds had fled venture investing because of unstable markets.

    With only five VC-backed startups going public in the first quarter, compared with 18 a year earlier, only traditional venture investors such as university endowments are likely to continue parting with their dollars.

    And venture capitalists have expressed concern about the financial health of some tech startups they currently back, as the weak economic outlook drives more companies to tighten their belts.

    A recent Gartner survey found that one in four U.S. chief information officers said their companies had cut back on planned 2008 information-technology budgets in the first quarter.

    “There is definitely going to be an IT slowdown,” Benchmark general partner Kevin Harvey said.

    As a result, venture capitalists said they were taking a harder look at the balance sheets of startups.

    “We’ve encouraged our companies to be thoughtful about having their balance sheets and cash accounts buttressed for what might be a difficult next couple of years,” Harvey said.

    At Foundation, Grosser said its tech startups that sell products to financial services companies were facing harder times as Wall Street firms struggle to keep their houses together.

    One company, which provides fraud protection and identification-management services to investment banks, has “definitely taken a hit,” Grosser said. (Editing by Martin Golan and Lisa Von Ahn)

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