Limited partners still may have far more money allocated to private equity than they know what to do with, but first-time venture capital fund managers are not reaping the overhang’s benefits.
The most recent example came last month when PE Week reported that Tejas Venture Partners of Austin, Texas, shut down after failing to secure enough capital for its inaugural fund, which had a cap of $100 million. Tejas is not the only first-timer scrapping to make it this year.
At least 60 U.S.-based venture funds (excluding fund-of-funds) received capital commitments over the past two quarters, but only 10 of them, or 16%, were first-time managers. At the current pace, only 20 first-timers will have raised an inaugural VC fund this year, compared to 51 such funds raised throughout 2004, which represented nearly 27% of all VC funds raised last year. Between 2000 and 2004, about 31% of VC funds raised were first-timers.
“I don’t think we’ve done a first-time manager in the last 12 months,” says Craig Nickels, a partner and co-founder of Alignment Capital Group, which manages a $250 million “Targeted Opportunities” program for the Colorado Public Employees’ Retirement System. “We’ve had a couple that we’ve been interested in and tried to champion, but there isn’t much interest out there unless its people who really established themselves somewhere else first.”
In comparison, first-time LBO fund-raising percentages have stayed more consistent over the same period, with a 21% showing so far in 2005, compared to an average of 26% from 2000 to 2004.
There is no easy way to explain the stark decline in first-time VC fund-raising success, or even to prove whether the chicken or the egg is to blame. For instance, are an increasing number of funds being turned down, or are fewer funds coming to market in the first place?
One hypothesis, however, is that LPs are still licking their wounds from rotten vintage years, such as 2000, when more than 34% – or 218 funds – of all VC vehicles raised were debuts.
“If John Doerr or Mike Moritz [of Kleiner Perkins Caufield & Byers and Sequoia Capital, respectively] spin out and launch a new fund, I’ll be the first in line,” says a corporate pension fund manager who requested anonymity. “But that’s almost the type of track-record hurdle you’re talking about for a new manager. If the manager is really new without any track record, then he doesn’t even get in the door.”