New Venture Capital Investment Nearly Comes to a Halt

It’s official: Institutional investors have put the kibosh on investing in new venture capital funds, though established firms with track records have been able to scare up some money. That’s the big news out of today’s announcement about fund raising trends in the first quarter of 2009 from Thomson Reuters and the National Venture Capital Association.

In the quarter, 40 venture capital funds raised $4.3 billion, down 40% from the first quarter of 2008 when 71 funds raised $7.1 billion. It was the smallest number of venture funds to raise money since the third quarter of 2003. The biggest shocker? Of those 40 funds, only 3 of them were new funds; the other 37 were raised by existing venture firms.

Read the rest of the post on BW’s TechBeat here.

Venture Capital Funding Enters Deep Freeze

It’s official: The venture capital market is freezing up. And don’t expect the market to warm up any time soon.

In the fourth quarter of 2008, venture capitalists raised only $3.37 billion, down a staggering 71% from the year-ago quarter, when VCs raised $11.67 billion, according to a January 20 release by Thomson Reuters and the National Venture Capital Association. This is the smallest amount of money raised since the second quarter of 2004, when VCs raised $3.3 billion.

The size of the average fund and the number of funds able to scare up capital is also rapidly shrinking. In the fourth quarter, 43 funds accounted for that $3.37 billion, down from 84 funds in the year-ago period. That is the smallest amount of funds raised since the third quarter of 2003, when 33 funds raised $1.8 billion.

The shrinking amount of capital means that fewer new companies will get financing, and that older startups without market traction are likely to wither away.

“With some notable exceptions, we can expect this slower pace to continue well into 2009,” said Mark Heesen, president of the NVCA in the press release.

After years of waiting for an industry shakeout that never happened, many VCs now expect the industry to shrink significantly since some institutional investors are pulling back from the venture capital asset class. “There are likely to be fewer firms over the next few years,” says Ira Ehrenpreis, general partner with Technology Partners, a firm based in Palo Alto, CA. “And that’s a good thing. A pruned tree will be healthier.” Ehrenpreis believes the industry could shrink by as much as 20%.

Another silver lining: The largest and most successful VC firms continue to be able to raise large war chests. Two of the three largest funds raised in the fourth quarter were by Accel Partners, a well-established firm that has invested in Facebook, JBoss, MetroPCs and many other prominent startups.

Accel raised an Accel Growth Fund with $480 million to invest in more mature new companies. It also raised Accel London III with $525 million to invest in young European startups.

What Capital Crunch?

The latest fundraising figures from the National Venture Capital Association and Thomson Reuters suggest that the economic slowdown is not deterring VC investment.

Here’s a snippet from the story I wrote today for BusinessWeek Online:
“There’s no capital crunch in Silicon Valley.

Despite turmoil in the stock market, jitters about mortgage financiers Fannie Mae (FNM) and Freddie Mac (FRE), and the worst market for initial public offerings in decades, big investors continue to pour money into venture capital funds

Some 71 venture capital funds raised $9.1 billion in the second quarter of 2008, up 3% from the year-ago quarter, according to a survey released July 14 by Thomson Reuters (TRI) and the National Venture Capital Assn. Investments in information technology, life sciences, and environmental technologies continue to drive the market. As the venture capital market becomes more global, Asia is emerging as an attractive location for investments.

The latest numbers signal that big investors are confident in the long-term future of the venture capital business. There does seem to be a flight to quality, however. The number of funds raised in the quarter fell 14%, down from 83 in the year-ago period. “

Check out the rest of the story here. It is based on several interviews with VCs and limited partners.

The Worst IPO Year on Record?

This year is shaping up to be the worst year for initial public offerings in perhaps 20 years.

In the second quarter of 2008, there were no venture-backed IPOs. Zero. Nada. Nothing.

I spoke to a bunch of big investors, venture capitalists, investment bankers and limited partners who invest in VC funds to find out what’s going on. Check out my story here that ran on BusinessWeek online.

In addition, I shot a video with DCM co-founder Dixon Doll and National Venture Capital Association President Mark Heesen. Check it out here.

VC Industry Hits Headwinds: Creative Capital Gets Nod in San Jose Mercury News

The venture capital industry is clearly in transition. The old school business model of raising modest amounts money to invest primarily in early stage startups is giving way to a different industry that features larger funds and, perhaps, less risky investments in more capital-intensive businesses that are more mature.

Scott Harris, a reporter from the San Jose Mercury News, picked up on this trend and made it the major theme of his recap of the National Venture Capital Association Conference’s annual confab.

In the story, Harris focuses on the conference’s highlight: a conversation between the two most successful venture capitalists of the last decade–John Doerr from Kleiner Perkins and Mike Mortiz from Seqouia Capital.

In the middle of the story, yours truly shows up as an expert source, talking about the growing concerns in the VC business over the industry’s generally poor investment returns.

[Begin]
Successful companies are facing a longer path to the liquidity deal that enables VCs and LPs to realize the gains from their investment. “We’re all frustrated because the average time to liquidity for a venture-backed company is now seven years,” said Pascal Levensohn of San Francisco-based Levensohn Venture Partners.

“It’s not a crisis, but there’s tension,” said journalist Spencer Ante, who explored the history of the venture industry in his new book, “Creative Capital.” “A lot of money is getting raised, and a lot is getting invested. But what are you going to get out of that money? That’s the question.”
[End]

One final thought: As the older more mature funds wrestle with these challenges, what is equally interesting is the crop of new back-to-basics funds–such as Founders Fund, O’Reilly AlphaTech, and 406 Ventures–that have been cropping up over the last few years. These new funds may help fill the void in early stage investing.

On the Road: Back from My Mini-Book Tour

Hey folks. Sorry for not posting the last few days but I’ve been on a cross-country whirlwind tour promoting my book and speaking about it.

The trip began at the Nantucket Conference on May 2-3, where I was invited to sit for a fireside chat about my book with the entrepreneur/venture capitalist/all-around cool guy Vinit Nijhawan.

This week, I took off for Northern California. On Monday, I was invited to speak on a panel about book writing at the Graduate School of Journalism at UC-Berkeley. Afterwards, Matt Richtel of the New York Times and Marcia Parker, who co-teach a course called “Covering Silicon Valley, invited me as a guest teacher. And then on Wednesday I moderated a panel at the National Venture Capital Association conference on corporate venture capital. It was a great session with Arvind Sodhani, the President of Intel Capital, and Steven Weinstein, who heads up venture at the biotech giant Novartis.

I will be publishing a few posts about these events over the next few days.