Early stage firms bounce back in Q3

Venture firms investing at the earliest stages accounted for nearly half of the fund-raising total during the third quarter, reversing a trend toward growth stage investing that looked strong during the second quarter.

Overall, U.S.-based VCs raised $4.8 billion for 33 funds during the third quarter, down from the 67 firms that raised $6.7 billion last quarter, according to preliminary data from PE Week. Thomson Financial (publisher of PE Week) is expected to release final fund-raising data later this month.

Of the 33 funds raised, 18 seed and early stage vehicles raised more than $2 billion. The number would have been higher if several traditionally early stage firms had not moved into balanced stage investing. Just last week, Ignition Partners, known for its early stage investments in the Northwest, announced it has raised its first fund dedicated to growth deals.

Also, Mohr Davidow Ventures raised $580 million in September, which was 45% larger than the $400 million fund it raised in 2005. A spokesperson declined to comment at the time, but Thomson Financial classifies the latest fund as “balanced stage.”

Other large balanced staged funds to close during the quarter include Battery Ventures, which raised $750 million for fund VIII and Bessemer Venture Partners, which raised $625 million for fund VII.

Several of the firms that raised early stage funds during the quarter went out for smaller funds. Advanced Technology Ventures raised $272 million, significantly smaller than the $720 million fund it raised in 2001. Partner Steve Bayloff told PE Week the firm had a target between $300 million and $360 million as of this spring. He cited the partners’ desire to have a shorter fund cycle to help ensure new partners could come on board or move up internally.

Hummer Winblad Venture Partners also decreased its fund size as the firm experienced some turn-over in its limited partners. Partner Mitchell Kertzman attributes the LP turnover to the firm’s poor performance during the dot-com era, when it was primarily investing from its $318 million fourth fund raised in 1999. The firm closed $183.5 million toward a $200 million sixth fund, less than half the size of the $424 million it raised for its last fund in 2000.

Growth investing has become increasingly popular among many VC firms, though the idea certainly isn’t new. Sequoia Capital has invested in growth stage companies since 1999, when it raised the $350 million Sequoia Capital Franchise Fund.

Other early stage players have added growth investing to their mandate since then. Draper Fisher Jurvetson has finished raising a $300 million growth fund, and North Bridge Venture Partners closed $545 million toward its first $550 million growth fund during the second quarter.

Early stage funds have outperformed other venture stages over the past 10 years, returning an average of 40%, according to the latest performance index by Thomson Financial. But balanced and growth stage funds have leapt forward during the past year. Balanced stage funds returned 25.4% and growth funds returned 23.5% between the first quarter of 2006 and the first quarter of 2007