The Next Generation of VC Funds Has Arrived

When New Enterprise Associates launched its 11th fund-raising drive last summer, many prospective investors snickered at the $1 billion target. Some remarked that the proposed size reeked of bubble-era hubris, and that NEA had vastly overestimated its own reputation.

“It may be a lot smaller than their last fund, but it needs to be even smaller than that,” remarked a limited partner in several venture capital funds. “Unless they’re opening some sort of buyout wing, I don’t see how they can ask for so much more money than Sequoia Capital or Kleiner Perkins.”

But the Baltimore-based firm stood its ground, and was rewarded well before Dick Clark entered Times Square.

The firm held a $994.6 million first close in early December, and is expecting to bust its target by securing a few additional commitments this month. It is the largest VC fund-raising coup of 2003, and ultimately should be the first $1 billion fund raised by a VC-only shop since a handful of firms did the deed in 2001.

More important than the numbers, however, are what they mean to the VC fund-raising market as a whole. This is an arena that has been stagnant for years, and only occasionally brightened by the promise of a massive influx of new offering memorandums from veteran firms.

NEA XI is the second example of this next-generation of funds, but hardly the last.

Just after NEA popped its bubbly, Domain Associates and Kodiak Venture Partners each held final closes on their fifth and third vehicles, respectively.

Novak Biddle Venture Partners and Spray Venture Partners held first closes on their latest offerings, and were joined by Lake Street Capital, which simultaneously scooped up some under-performing investment assets from Intel Capital.

“This was the best fund-raising reception we’ve gotten in our firm’s history,” says Arthur Klausner, a general partner with Domain Associates. “I think that it’s partially because investors are looking to increase their exposure to health care, which is what we focus on.”

The Domain fund closed with $500 million, and will be accompanied by a side fund for friends and family of the partnership. This is a similar structure to what the Princeton, N.J.-based firm did back in late 2000, when it raised $464 million for its fourth fund and added an $11 million side vehicle.

“It was interesting because even though LPs were very receptive to the fund, there was still more due diligence than ever before,” says Klausner, who adds that many of the questions revolved partnership stability. “There were a reasonable number of questions about the team and making sure that all of us were fully on board.”

Similar to Domain, Kodiak did not stray far from its previous fund target. The Waltham, Mass.-based firm netted $290 million for its second fund in 2001, and raised $300 million for Fund III, according to a filing with the Securities and Exchange Commission.

As part of the new fund-raising effort, Jim Furneaux transitioned from a general partner role at Kodiak into that of a senior advisor.

Ditto for Bethesda, Md.-based Novak Biddle Venture Partners, which is looking for $150 million after having raised $121 million in 2001.

So far, Novak Biddle has closed on $51.7 million. Other first closes include $71 million for Spray Venture Partners II, and approximately $80 million for a second offering from Lake Street Partners.

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