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Venture fundraising is off by 47 percent this year, as the general partners decided not to tap pension funds for more money while those limited partners were feeling the crunch of a crappy economy — and because the venture funds themselves often had little to show after years of lame exits. It’s kind of like a teenager who doesn’t want to bug his laid-off mom for an allowance, especially since he hasn’t been performing well in school.
The refrain for those who sat out 2009 seems to be, maybe this year. But Mark Heesen, president of the National Venture Capital Association, threw some cold water on the idea, noting that while some firms that sat out 2009 from a fundraising perspective would be fine, in 2010 they’ll be going up against venture firms that need to raise their own funds, which means general partners may have to make some hard choices about where their money goes. And not every firm is going to make it in what Heesen calls, “a leaner, more capital-efficient asset class comprised of firms with proven track records of delivering value to limited partners.”
Of course, venture firms, with their 7- to 10-year life cycle don’t just shut their doors one day and go home. What generally happens is a process of attrition whereby associates, junior partners, entrepreneurs-in-residence and the like leave for new gigs after they see that fundraising isn’t going well, and there may not be a spot for them in the new fund. Then because someone has to stick around to manage the fund’s existing investments, a general partner or two still keeps an office and tries to get the investments already made to an exit.
This can drag on for years, unless someone sells the portfolio in the secondary market. I’ve seen it happen here in Austin on a few occasions, and it’s like watching a slow death. It’s especially painful because the people running venture firms are not the kind of folks who like to hang out and shepherd an investment all the way to completion without having the challenge and power that a fresh pot of money and new investments can provide.
So as an entrepreneur seeking money, the best bet is to understand how far off a firm you’re talking to is from having to go back to its limited partners and ask for more money. It also makes sense to know how well they have done in providing returns for their limited partners. Broad returns information can be found on the NVCA web site, while a few organizations such as the California Public Employees’ Retirement System and the University of Texas Management Co. publish some data on the actual returns of funds those organizations invest in.