Venture capital firms raised an anemic $1.6 billion from their investors in the third quarter of this year, according to data out today from the National Venture Capital Association, the lowest amount since the first quarter of 2003, when firms didn’t even break $1 billion. Back then, of course, the venture industry had been hit with a double whammy: Not only had it seen the billions it invested in telecommunications companies disappear, but it was still reeling from the dot-com implosion.
This time around, the global economic malaise has affected limited partners — the people who invest in venture funds — causing them to turn off the spigot, not because the industries in which venture firms invest have so spectacularly imploded, but because the LPs’ entire portfolios have shrunk, leaving them with less money overall. Harvard’s University’s endowment is down 27 percent, for example. Subsequently just 17 firms raised money in the latest three-month period, with four of those being first-time funds, including the Andreessen Horowitz fund created by the Netscape and Opsware founder Mark Andreessen.
But is this the bottom for the venture market? Limited partners began pulling back this time last year as their asset allocations got all out of whack, and we found ourselves reading about those refusing to pony up their commitments and the subsequent shrinkage at venture capital firms. So far this year firms have raised 87 funds and a total of $8.37 billion, less than the entire third quarter of last year.
With the holidays coming up and a significant overhang left over from the previous years’ fundraising, my guess is that venture capitalists won’t see their ability to raise funds improve in the next couple of quarters. Plus, if limited partners and venture capitalists are serious about lowering the overall amount going into the industry to about $13 billion a year, then there’s still plenty of money on the table. A fact that’s going to crimp the lifestyles of more than one VC.