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Some 40 venture funds raised $4.3 billion during the first quarter of 2009 — the fewest to raise money in a single quarter since the third quarter of 2003, according to data out today from the National Venture Capital Association. And while the dollar figure was 23 percent higher than the $3.5 billion raised in the fourth quarter of 2008, it was 40 percent less than the comparable three-month period a year ago, when 71 funds raised $7.12 billion.
The NVCA tried to put a positive spin on the news, stressing that established venture firms are still able to raise sizable chunks of cash. But the negatives are becoming harder to hide. One reason for the downturn in fundraising, as the industry group notes, is that many VCs are holding onto their cash while they wait for conditions to improve — a lemming-like mindset of cash conservation that won’t help pull us out of the downturn. The other reason is that the limited partners who fund venture capital firms are pinching their pennies as well.
Many of the large endowments that invest in the venture industry have seen their net worth plummet. As the stock market sinks in value, it means a greater proportion of their portfolios is now invested in riskier and less liquid investments such as venture capital funds. Since most endowments can only invest a certain percentage of their dollars in such risky assets, they need to pull back from their investments in the venture sector.
However, there’s another, more urgent reason we’ll be seeing fewer funds raise money over the next few years — the venture model is ailing. Exactly how is a matter of debate: Some argue there’s too much money in the space, and others argue that the days of huge IPOs are a thing of the past. One way or another, one result of this downturn could be the culling of venture firms that should have taken place after the dot-com bust. We may also see successful firms adapt their models to reflect both the smaller funding needs of many technology companies and the greater amount of time that lies between a startup and a blockbuster IPO. But like any culling or evolution, that’s going to hurt.