VC fund-raising falls flat in Q3

Venture fund-raising slowed to a crawl during the summer, with about 40 venture funds raising less than $5 billion during the third quarter, according to a preliminary tally by PE Week.

The Q3 totals were down from the second quarter of this year, when 49 funds raised $11.2 billion, as well as Q3 of 2005, when 45 venture funds raised $5.4 billion, according to Thomson Financial (publisher of PE Week) and the National Venture Capital Association. Definitive Q3 numbers are due to come out from Thomson Financial and the NVCA next week.

Unlike the frigid VC business, buyouts remained red hot. A dozen funds have raised $140 billion in the first nine months of the year, putting the market on pace to break the record it set last year (see story, page tk), according to data compiled by Buyouts (a Thomson Financial publication).

Third quarter fund-raising is traditionally slow in the venture business, but the most recent quarter was especially tedious. Nearly a third fewer firms were in the market than during the same period last year.

Of note, about one-fourth of all commitments raised in Q3 were either earmarked for international investments or were for funds that feature a significant global component. Matrix Partners raised $150 million for an India fund, Greylock Partners raised $150 million for an Israel fund and New Enterprise Associates raised $105 million for its NEA IndoUS Ventures India-targeted fund. Add to that DCM-Doll Capital Management’s $500 million fifth fund, of which more than one-third will be invested abroad and Partech International, which raised under $100 million and has a significant international interest.

Life sciences firms managed to pull together a fair amount of commitments during the quarter, with Domain Associates closing on its seventh fund, a $700 million effort, which is substantially larger than its $500 million predecessor. Meanwhile, Thomas, McNerney & Partners closed its second life sciences fund at $375 million, and De Novo Ventures closed its third fund at $300 million.

No doubt, life science firms found fund-raising comparatively easy since, during the first half of the year, they seemed to be about the only VCs able to take their companies public. Domain, for example, saw five of its portfolio companies launch IPOs in 2006, and it has another ready in registration.

But like the fund-raising market, the IPO market was moribund in Q3. Only eight venture-backed companies went public, raising $934.2 million in what was the slowest quarter since 2003, according to the Exit Poll report by Thomson Financial and the NVCA. In contrast, 19 VC-backed companies went public and raised more than $2 billion in Q2, and 19 VC-backed startups raised nearly $1.5 billion in Q3 of 2005.

“The venture-backed IPO volume has fallen to alarmingly low levels, suggesting that the public markets are not the destination they once were for emerging growth companies,” NVCA President Mark Heesen said in a statement.

The third quarter saw just a single life sciences company go public in the United States: Osiris Therapeutics (Nasdaq: OSIR) offered at the bottom of its range at $11 on Aug. 4 and was down to $10.66 as of last week.

Tech IPOs that managed to sneak through the tight window have done well, with four of the five that debuted in the third quarter trading above their offering prices. Riverbed Technology (Nasdaq: RVBD), which helps manage wide area network bandwidth, topped the charts, more than doubling its Sep. 21 offering price of $9.75 per share, closing up to $19.55 in trading last week. DivX (Nasdaq: DIVX) was up to $21.43 from its Sept. 22 offering price of $16 per share. Data management company CommVault (Nasdaq: CVLT) offered at $14.50 on Sept. 22 and was up to $17.61 as of press time last week. Outsource printing company InnerWorkings (Nasdaq: INWK) shot up to $12.26 from its Aug. 16 offering price of $9. Shutterfly (Nasdaq: SFLY) was the only VC-backed tech IPO lagging. It closed at $13.64 last Thursday, down from its $15 offering price on Sept. 29.

With IPO liquidity limited, VCs are increasingly turning to strategic acquirers to step in and salvage their portfolio plays. But even there the numbers are down. Buyers picked up 74 venture-backed startups for a disclosed value of $2.7 billion in the third quarter, according to Thomson Financial and the NVCA. Those figures were down from the second quarter of this year, when 91 VC-backed startups were acquired for a disclosed value of $3.74 billion. The Q3 total was also down sharply from the same period a year earlier, when 98 VC-backed companies were snapped up for a disclosed value of $4.37 billion.

The biggest deal of the quarter was Gilead Sciences’ $419.5 million buy of Corus Pharma, a Seattle company that was developing respiratory drugs. Gilead invested $25 million in the startup in April.