Hard times persist through Q3

How bad has the downturn been? Nearly a year after Sequoia Capital told its CEOs to “Get real or go home” at its all-hands meeting, it seems that the industry’s worst nightmares haven’t come true.

Firms are still able to raise funds, startups are raising cash, strategic acquirers are buying and at least a handful of companies have managed to piece together public offerings.

Still, it’s been anything but easy.

Fund-raising

Brand name firms raised big funds during the third quarter. Most notably, Vinod Khosla closed on $1 billion for two cleantech funds and Marc Andreessen raised a $300 million debut fund for Andreessen Horowitz, beating the $250 million target.

To be sure, not everyone has had an easy time. Draper Fisher Jurvetson, for example, cut its fund target to $400 million, down from $600 million according to reports. The firm has yet to raise $200 million in actual commitments, records show.

Throughout the past year, large institutional limited partners became less likely to commit to VC and PE funds as the size of their public holdings diminished. The California Public Employees’ Retirement System has done due diligence on just six private equity funds this year, down from the 31 it looked at in 2008 and way off pace from the 76 it closely examined in 2007, according to public reports.

This, it’s no surprise then that VC fund-raising took a downward turn during the third quarter, with 14 U.S.-based venture funds raising about $1.5 billion, according to preliminary data from Thomson Reuters (publisher of PE Week). That’s down from 55 U.S. funds that raised $8.1 billion during the same period in 2008.

Deal data

There’s little doubt that cash-strapped startups are having a harder time raising capital during the midst of an economic downturn, compared to a year ago. More than 350 startups nationwide raised $2.85 billion in the third quarter, according to preliminary data from Thomson Reuters, compared to 867 companies which raised $6.4 billion during the same period a year ago.

Most of the capital evaporation came from corporate and banking pools, which typically are the first investors to back off from investing in startups when the economy takes a turn for the worse. Consider a handful of mega deals done last year, such as the $140 million financing of SolarReserve that counted Citi and Credit Suisse Group as investors. In addition.Trion World Network raised $70 million from GE Capital, Bertelsmann and Time Warner. Large deals like these, financed from corporate investors, just haven’t taken place this year.

Still, the most talked about startups don’t have any trouble getting funding from dedicated investors. During the third quarter, Tesla Motors raised $82.5 million from investors for its Series F round, the largest VC-backed deal in Q3, based in preliminary data. Green building company Serious Materials raised $60 million from New Enterprise Associates, Foundation Capital, EnerTech Capital and others. DNA sequencer Pacific Biosciences raised $68 million this quarter from AllianceBernstein, The Blackstone Group and others. There are even a few big deals that haven’t quite closed, such as Twitter’s $100 million investment round that has been reported by various sources, but not yet confirmed.

Even Sequoia Capital itself, the dowager of doom from last year, has been busy. The firm participated in 14 investments during the third quarter, helping startups and late stage companies raise nearly $200 million collectively, records show.

Acquisitions

Startups saw a ray of hope from strategic acquirers during the third quarter, as corporations again looked again to cherry pick from the private market. Just last week, Google Inc. said it expects to buy one small company a month as it rekindles its acquisition engine (see story, page 7).

The largest acquisition in Q3 was Amazon’s $928 million purchase of Zappos for cash and stock. Zappos had raised $60 million from Sequoia Capital and other investors.

Other notable acquisitions in Q3 included:

• McAfee, which bought email protection startup MX Logic, for $170 million. The company had raised about $33 million from Axiom Venture Partners, Adams Street Partners and others.

• Computer Associates bought network performance company NetQoS, for $200 million. The company raised $16 million from Liberty Capital.

• Intuit bought consumer financial management company Mint.com, which had raised about $32 million from Benchmark Capital, The Founders Fund and others, for $170 million. Intuit also paid $170 million for tax-management company PayCycle, which had raised more than $29 million from Draper Richards and August Capital Management and others.

• And VMWare bought Web-development company Springsource, after it raised $15 million from Benchmark and others, for $420 million.

Going Public

Perhaps the best news for VCs during the third quarter was the IPO market, which showed a rebound and was highlighted last week by the debut of lithium-ion battery maker A123 Systems, which raised $380 million in its offering. The company closed its first day trading at $20.29 a share, up more than 50% from its offering price of $13.50 per share.

A123 had raised $242 million in venture funding, before the offering, from North Bridge Venture Partners and others (see story, page 7).

Meanwhile, other venture-backed companies recently set their IPO terms, paving the way for IPOs in the next quarter.

Echo Global Logistics Inc., a transportation company, plans to sell 5.7 million shares at between $13 and $15 per share. The company raised $17 million from New Enterprise Associates, which owns a 15.3% stake in the company, according to reports. The company would be worth $322 million if it prices at the high end of its range.

Omeros Corp., a drug company, plans to sell 6.82 million shares at a price between $10 and $12 per share. The company raised $110 million from ARCH Venture Partners, Southern Cross Capital and other investors. It will be worth $255 million if it prices at the high end of its range.