I read an interesting report put out by the National Venture Capital Association and Thomson Reuters. The title is Venture Capital Fundraising Activity Falls in the Fourth Quarter of 2008.
They tracked forty-three venture funds and stated that they raised a total of $3.4 billion in the fourth quarter of 2008 when the fourth quarter of 2007 was at $11.7 billion. In total, $28 billion was raised in 2008 which was down 21% since 2007. While this is “a” metric it is not “the” metric, meaning it can be used as an indicator but like any indicator it is probably best not to draw conclusions solely on one indicator (much like technical analysis when applied to stocks).
What Exactly Is This Statistic?
The total amount raised by venture funds is not the amount invested in startups but the amount venture funds have raised themselves. While a few venture funds are made up of money from the partners in the fund it is more often the case that the venture capital company has raised money themselves. Seems odd doesn’t it.
How Venture Capitalists Raise Money
In many cases a venture capital company may have more than one fund. For example, they may raise $100 million into their VC Fund I, they then turn around and find companies to invest in. In some cases they are restricted to only invest in certain industries or stages of companies. They may have agreed to this when their investors agreed to provide funds. They now invest those funds, work with the companies, hope to liquidate in some manner so they can provide returns to those that invested. Meanwhile they raise another fund VC Fund II.
How Venture Funds Work
Now, as an investor in a venture capital company you are actually an investor in one of their funds. Therefore an investor may be in VC Fund I and not VC Fund II. Let us say that VC Fund II has a portfolio company sell for 100 times initial investment, the investor is out of luck because even though they work with that venture capital company, they were not invested in VC Fund II. Interesting huh.
What is more interesting, is to remember that when you are being drilled by a potential venture capital investor in your company, that they have investors to answer too as well. I once gave a company update, presentation, not to the investors of the company I was with but to the investors in the venture capital company, large institutional investors, to update them. It was quite interesting to see the venture capital company deal with their investors, nice to see them humbling themselves, not something most VC’s do.
What Does this Lower Q4 2008 Raise Mean?
It is tough to say. If large funds were raised in 2007 they may have funds with uninvested capital and are not in fund raising mode right now as they are still investing. They may also have chosen to wait and raise funds when the overall economy is in better shape. Still it is interesting to watch, and I encourage you to visit National Venture Capital Association if you are interested in following the venture capital industry.