VC Fund-Raising Rises, Pipeline Remains Strong

Venture capitalists were playing defense last week, when it was reported that investment totals had dropped nearly 26% between the second and third quarters. “If it’s true, how come everyone seemed so busy?” one East Coast investor asked.

The answer, perhaps, is that everyone was busy fund-raising.

VC firms have raised more capital through the first three quarters of 2004 than in all of 2003 combined, according to new data released today by Thomson Venture Economics (publisher of PE Week) and the National Venture Capital Association (NVCA). In all, 125 venture funds have received nearly $11.25 billion in commitments through Sept. 30, 2004, compared to just $10.5 billion raised for 134 funds in all of 2003 (see chart, page 1).

And the number is expected to rise again in Q4, with Ignition Partners (see story, opposite page) closing on $300 million last week, U.S. Venture Partners preparing to close on $600 million and Austin Ventures gearing up to raise $500 million.

“There is a lot of interest out there, so the supply doesn’t seem to be slackening,” says Kelly DePonte, a partner with fund placement agent Probitas Partners. “I don’t think we’re going to have the outrageous peak we had in 2000, but that may only be because general partners are displaying discipline by raising 50% or less than they did with their last fund. The limited partners, though, are rushing wildly all over the place, which means that some VCs are getting funded even though they shouldn’t be.”

In the third quarter, 46 venture firms raised just over $5.5 billion, which represents a 78% increase over the $3.1 billion raised in the second quarter. Leading the way was Oak Investment Partners, which raised about $1.55 billion for its eleventh fund. Also holding major Q3 closes were InterWest Partners with $600 million, Battery Ventures with $450 million, Ferrer Freeman & Co. with $385 million and Benchmark Capital with $375 million (see chart on the right).

It is important to note that the Thomson Venture Economics and NVCA numbers only include capital committed during the quarter itself. ATA Ventures, for example, closed on the final $80 million of an inaugural fund that now stands at $145 million. Other notable first-timers included QuakerBioVentures with $100 million of its $280 million inaugural fund, Hopewell Ventures with $63.3 million ($100 million to date), Delta Russia Partners with $58.7 million, and Accuitive Medical Ventures with $18.6 million ($53.6 million to date).

All of this activity, of course, has had some unintended consequences. Not only are some undeserving funds getting raised, but general partners are beginning to push the envelop on partnership terms.

Accel Partners, for instance, is currently raising a $400 million vehicle that features a 30% carried-interest structure. Even buyout firms are getting into the act, with Boston-based ABRY Partners nearing a $950 million close for a media-focused fund that also includes a 30% carry.

“It is surprising to see firms getting premium carries again, but I’d rather have them raise the carry and keep fund sizes reasonable, than the other way around,” says Glen Holland, a director with Schott Capital. “It was just last year that GPs were having to make concessions on terms. That has changed quickly.”

Both DePonte and Holland expect that VC fund-raising activity will continue on its torrid pace through Q4, and well into next year. They also say to keep an eye on the ever-expanding LBO market, which saw more than $14 billion in fund-raising during Q3, which was a 9.4% dip from the $15.7 billion raised in the second quarter. Among the major buyout firms coming to market are Carlyle Group with a $5 billion fund, Clayton, Dubilier & Rice with a $3.5 billion fund, and Warburg Pincus with a proposed $8 billion global offering.

A number of major European buyout shops are expected to come to market next year, although those events are not included in the Thomson Venture Economics data.

Through Sept. 30, U.S.-based buyout funds had raised $32.49 billion, compared to $29.62 billion for all of 2003.