American venture capital funds raised just $6.9 billion in 2002, $100 billion less than was raised for the sector in the bubble year of 2000. The number of funds in the market has also nose-dived from 653 in 2000 to 108 last year. Twenty-six funds, including some large, high-profile investors returned a total of around $5 billion to investors. This means that net fund raising in 2002 was just $1.9 billion, a level last seen in 1991.
The amount of money being returned to investors and the massive capital overhang, which the NVCA estimates at $80 billion, have both constrained fund raising. Most venture firms still have sufficient funds to make new investments and continue supporting existing portfolio companies. A reduction in company valuations and the number of investment opportunities has also caused firms to change their strategy.
Investment has shifted towards sectors linked with new national priorities such as security and military applications. Life science-orientated funds fared better than most and include last year’s largest offering, the $900 million MPM Bioventures II fund.
The trends seen in the venture capital industry also affected buyout fund raising, although the drop here was less precipitous. During the fourth quarter of 2002, there were only 19 buyouts funds raised, down from 47 in the fourth quarter of 2001. Like the venture capital market, buyout fundraising has stayed relatively conservative for the year, with smaller and fewer funds being raised. The total for 2002 was $31.6 billion raised by 64 funds.