Venture Capital Funding Enters Deep Freeze

Posted by: Spencer Ante on January 20, 2009

It’s official: The venture capital market is freezing up. And don’t expect the market to warm up any time soon.

In the fourth quarter of 2008, venture capitalists raised only $3.37 billion, down a staggering 71% from the year-ago quarter, when VCs raised $11.67 billion, according to a January 20 release by Thomson Reuters and the National Venture Capital Association. This is the smallest amount of money raised since the second quarter of 2004, when VCs raised $3.3 billion.

The size of the average fund and the number of funds able to scare up capital is also rapidly shrinking. In the fourth quarter, 43 funds accounted for that $3.37 billion, down from 84 funds in the year-ago period. That is the smallest amount of funds raised since the third quarter of 2003, when 33 funds raised $1.8 billion.

The shrinking amount of capital means that fewer new companies will get financing, and that older startups without market traction are likely to wither away.

“With some notable exceptions, we can expect this slower pace to continue well into 2009,” said Mark Heesen, president of the NVCA in the press release.

After years of waiting for an industry shakeout that never happened, many VCs now expect the industry to shrink significantly since some institutional investors are pulling back from the venture capital asset class. “There are likely to be fewer firms over the next few years,” says Ira Ehrenpreis, general partner with Technology Partners, a firm based in Palo Alto, CA. “And that’s a good thing. A pruned tree will be healthier.” Ehrenpreis believes the industry could shrink by as much as 20%.

Another silver lining: The largest and most successful VC firms continue to be able to raise large war chests. Two of the three largest funds raised in the fourth quarter were by Accel Partners, a well-established firm that has invested in Facebook, JBoss, MetroPCs and many other prominent startups.

Accel raised an Accel Growth Fund with $480 million to invest in more mature new companies. It also raised Accel London III with $525 million to invest in young European startups.

Reader Comments

David

January 21, 2009 4:11 AM

Think anti-cyclical and stop running after revenue that is made today. Because that is when the innovation will stop. It's a vicious circle - no money no innovation gets funded. Only funds that do not follow the herd mentality will get a positive IRR in the next years.

Ini

January 21, 2009 12:03 PM

I think vc should still continue to fund both mature and new companies that has proof of making profit.Despite the world economic meltdown there are still pockets of emerging economies that are able to make decent profits,viable start up companies should still be considered after due diligence checks.

Heath

January 21, 2009 12:31 PM

One thing to keep in mind when reviewing the amount raised by VC funds is the fact that the actual cash raised in previous round may not have been utilized as of yet as standards have been raised for investment to reduce risk in these shaky times.

Art Seaborne

January 22, 2009 9:44 AM

"Chaos creates Opportunities". There will always be paradym pioneers creating future possibilities. This is a fantastic time to design our future!

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Bloomberg Businessweek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, and Douglas MacMillan, dig behind the headlines to analyze what’s really happening throughout the world of technology. Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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