Venture Captal Commitments "Rightsizing", More

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  • 1. Contacts: Jeanne Metzger, NVCA, 703-524-2549 ext. 116, jmetzger@nvca.org Jesse Reyes, Venture Economics, 973-645-9734, jesse.reyes@tfn.com VENTURE CAPITAL COMMITMENTS “RIGHTSIZING” More Money Returned Than Raised in Q2 2002 August 5, 2002 – Newark, NJ - In the second quarter of 2002, the venture capital industry showed signs of positive restructuring as large firms began to downsize their funds in order to respond to the new economic realities. At the same time, the majority of new funds raised in Q2 2002 will focus on early stage investments, sending entrepreneurial companies a positive sign regarding their future abilities to obtain venture capital. In an unprecedented trend, venture capital funds returned more money to their limited partners (LPs) than they raised in new funds in the second quarter of 2002. Recognizing that it was unlikely that venture firms could effectively invest billion dollar funds in the current uncertain and volatile environment and reap the stellar results that investors expect, 7 firms returned $2.7 billion to LPs. Ostensibly, this generates goodwill with LPs to help future follow-on fundraising efforts. This downsizing also relieves some of the contentious fee burden placed on LPs on uninvested capital which is at nearly 200 billion for venture and buyouts collectively and decreases the cost basis for the tremendous fund raising efforts in 1999 and 2000. Nevertheless, 30 funds did raise $1.8 billion in Q2 2002, which is a slight increase from the $1.7 billion raised in the first quarter of this year. When the amount returned to LPs is factored into the fundraising totals, committed capital was a negative $887 million. The firms who have reduced their fund size have all been veteran firms, including Accel Partners, Austin Ventures, Charles River Ventures, Walden International, among others. This trend is a sure sign that LPs and venture firms alike are carefully allocating their capital assets for future investments. The 30 funds raised in the second quarter represents a 31% decrease compared to the 44 funds raised last quarter. The increase from $1.7 billion to $1.8 billion in commitments is not remarkable, but it does illustrate the trend of fewer funds with smaller amounts of committed capital, bringing the amount of funds and their sizes to an equilibrium with the amount of venture investing taking place in the current market. Mark Heesen, president of the National Venture Capital Association commented, “The continued slow pace of venture capital fundraising is expected and probably will continue for some time because most venture funds still have ample resources to support their investment strategies for next 12-18 months. Limited partners continue to be interested in venture capital knowing like any other asset class it runs in a business cycle.”
  • 2. Venture Capital Buyout & Mezzanine Fund of Funds Year/Quarter # of Venture # of Buyout/ # of Fund of Funds Capital Funds Mezzanine Funds Funds ($ Billions) ($ Billions) ($ Billions) 288 31.1 180 70.5 39 10.9 1998 431 60.5 169 67.6 59 13.5 1999 635 107.7 169 85.0 61 14.7 2000 127 17.3 49 15.9 26 5.4 1Q'01 92 11.2 32 11.0 22 2.5 2Q'01 67 7.1 43 15.9 11 2.7 3Q'01 94 5.7 51 14.8 20 3.2 4Q'01 44 1.7 14 5.8 10 1.9 1Q'02 30 1.8 17 6.2 5 0.6 2Q'02 *Quarterly number of funds will not equal annual number of funds because a fund raises money across multiple quarters. On a positive note, 28% of the total $1.8 billion came from first time funds, which is a slight increase from the previous quarter when first time funds represented approximately 18% of the total amount raised in the quarter. Another optimistic factor is that the majority of the funds raised this quarter focused on early and seed stage investments, instead of later stages, giving newly starting companies a place to find venture capital for their businesses. New Venture Capital Funds Quarter No. of Funds Amount Raised ($bil) % of Total Amount Raised Q1'00 48 3.3 14.1 Q2'00 68 3.6 13.8 Q3'00 46 3.7 13.1 Q4'00 70 6.0 27.7 Q1'01 42 1.8 13.9 Q2'01 27 .9 8.1 Q3'01 17 .5 6.9 Q4'01 37 2.1 36.8 Q1'02 12 .3 17.6 Q2'02 11 .5 27.8 New Venture Capital Funds vs Follow-on Funds No. of New No. of Follow-on 150 281 1999 220 415 2000 109 231 2001 12 32 Q1'02 11 19 Q2'02 There was a geographic diversification in fundraising activity in Q2 2002 compared to previous quarters. The Greater New York area raised the most funds this quarter, even though the amount those five funds raised was only half the amount that was raised in this same region last quarter. Indicating that many venture firms are looking at a wider variety of industry sectors that are not reliant on what occurs in Silicon
  • 3. Valley, funds continue to be raised throughout the United States. Just as many funds were raised in the Mid Atlantic, Ohio Valley, and the Northwest as were raised in Silicon Valley. Thomson Venture Economics, a Thomson Financial company, is the foremost information provider for equity professionals worldwide. Thomson Venture Economics offers an unparalleled range of products from directories to conferences, journals, newsletter, research reports, and the VentureXpert database. For over 40 years, Thomson Venture Economics has been tracking the venture capital and buyouts industry. Since 1961, it has been a recognized source for comprehensive analysis of investment activity and performance of the private equity investment community, in-depth industry knowledge, and proprietary research techniques. Private equity managers and institutional investors alike consider Thomson Venture Economics information to be the industry standard. For more information about Thomson Venture Economics, please visit www.ventureeconomics.com. Thomson Venture Economics’ Private Equity Performance Database provides an array of benchmarks ranging from individual vintage year benchmarks, industry returns, cashflow and overhang analysis, all of which are available on our VentureXpert web product. In addition to the web product, Thomson Venture Economics offers various books and reference guides under our Investment Benchmark Report series. For further inquiries, please contact Neil Goldstein at (415) 732-6293 or via email at neil.goldstein@tfn.com. The National Venture Capital Association (NVCA) represents over 450 venture capital and private equity organizations. NVCA’s mission is to foster the understanding of the importance of venture capital to the vitality of the U.S. and global economies, to stimulate the flow of equity capital to emerging growth companies by representing the public policy interests of the venture capital and private equity communities at all levels of government, to maintain high professional standards, facilitate networking opportunities and to provide research data and professional development for its members. ###