Venture Capital Update for Q1 2009

I’ve said in the recent past that I believe there is trouble in the supply chain of venture capital and that 2009 might be a significantly down year for fund raising with a potential total raise of $10 billion. The National Venture Capital Association just released numbers today that confirm the trend but suggest my $10B 2009 target may be a bit too low. That said, I’m not adjusting the target yet.  The reason this subject is important is because it affects the cost of capital for start-ups and the “ways and means” of how they get started in the first place.

The Q1 2009 VC raise is $4.3 billion, up from $3.5 billion in Q4 of 2008.  That’s better than I would have guessed but it’s still down significantly from the $6.4B and $7.1B in Q1 of 2007 and 2008, respectively.  It’s looking like Q2 will be the real tell-tale quarter that either delivers total funding in the $10B range at the half-year mark or shows a precipitous drop.  I still believe the latter will be the case because VC fund raising takes a considerable amount of time…sometimes as much as 6-9 months to complete. This means that the fund raising that closed in Q1 would have been in progress since mid-2008. Undoubtedly, the global economic situation scared some limiteds off over that time; that said, there was probably enough momentum to carry some of the deals with the bigger, top-tier firms through to closing the fund. TechCrunch has written about two of those top tier funds in their summary of this data.

One other important observation from the data has to do with the number of new and follow-on funds that were involved with rasing in Q1 2009:  only THREE new funds and 37 follow-on funds.  To be clear, the number of new funds raising capital is three times smaller than any other qarter over the past 2 years (there were 10 new funds in Q1 of 2008 and 11 in Q4 of 2008).  VentureBeat has suggested that there is a growing list of “walking dead” VC firms…and I think we’ll start to understand how true that is based on Q2’s data.

Here’s the updated the bar-chart that graphs VC fund raising by quarter starting in Q1 of 2007 through Q1 of 2009:

VC fund raising through Q1-2009

VC fund raising through Q1-2009