The third quarter of 2009 represents a new low in the on-going analysis of VC fund raising. Below is the chart; numbers on right are in MILLIONS of dollars.
In Q3 of this year, only 17 funds raised capital compared to 27 in Q2 and 50 different funds in Q1. The total amount raised was $1.5 billion down from $1.96 billion in Q2, bringing the total for the year to $7.5 billion. In short, that means we hit a level that “represents the smallest number of venture funds raising money in a single quarter since the third quarter of 1994 when 17 funds were also raised and the lowest level of dollars committed since the first quarter of 2003 when $938 million was raised.”
Now, the biggest question is how much the (apparently, at least at the time of this writing) rebounding economy will positively affect Q4 fund raising. The IPO market window is open for especially healthy companies and M&A activity has picked up. This doesn’t mean that valuations in either case are back to normal levels and therefore a “wait and see” attitude toward this asset class is very possible. This sort of stuff is no fun unless someone goes out on a limb…so here we go: I predict that Q4 will come in right at $2.0 billion and, therefore, the total funds raised by venture capitalists in 2009 will come in just under $10b.
To restate: the cost of capital will remain high for start-ups; and these three trends are still valid:
- To the LPs, the venture capital asset class is going to largely show negative returns based on the commonly used 10-year rolling average calculation
- Any exit via IPOs or M&A will be at fundamentally lower levels…consistency and predictability is highly unlikely
- while probably improved, significant liquidity concerns remain in the limited partner world of university endowments and public pension funds
According to the NVCA press release:
“Anecdotally we are hearing that fund raising activity is accelerating as more firms that were waiting for economic recovery are beginning to formally seek commitments,” said Mark Heesen, president of the NVCA. “The reality, however, is that many limited partners are still determining their long term strategies in wake of the past year’s financial crisis and that slows the process down considerably. We expect commitment levels to remain modest for the remainder of 2009 with gradual increases beginning in 2010.”