VC prediction: strong Q4 fund-raising

The fourth quarter VC fund-raising will likely rebound from its third quarter slump to finish the year with the largest total since the dot-com boom, experts say.

Some 52 venture funds raised $4.9 billion during the third quarter, according to data collected by the National Venture Capital Association and Thomson Financial (publisher of PE Week). That’s down from the second quarter of this year, when 62 funds raised $13.4 billion, as well as the third quarter of 2005, when 62 venture funds raised $5.6 billion. Overall, VCs have raised more than $25 billion for the first nine months of the year.

But Q4 could be a strong finish, says Kelly Deponte of placement agency Probitas Partners in San Francisco. “We’ve been hearing from LPs that they’ve finally got time to deal with mid-market players,” he says. “Now that many of the big buyout funds are closed, they have more bandwidth for other players.”

But not all of that money is going to traditional, U.S. early stage venture capital. “$20 billion (raised year-to-date) feels like its too much, but it’s being deployed in different ways,” Deponte says. “It’s hard to know how much of that money is actually going overseas, for example.”

Deponte also points to the emergence of funds with a significant portion set aside for venture growth equity, a form of later stage investment that regularly puts tens of millions of dollars to work at a time. New Enterprise Associates, for example, earmarked $1.5 billion of its $2.5 billion new fund raised this year toward growth equity investments.

Still, the venture industry may be getting too much money Deponte says. “You’ve got some LPs who recognize that if you’re not picking the top quartile players, you’re not getting returns,” he says. “The older LPs aren’t re-upping, but are getting replaced by people who don’t know the valley as well.”