Bridled enthusiasm

US venture groups had their best stretch in years when it came to fundraising in 2005. And they could have raised more. Ken MacFadyen reports.

US venture groups may be remiss to see 2005 in their rear-view mirrors, as the year represented the best stretch in awhile to raise a fund. According to the latest data released by The National Venture Capital Association, US VC groups received a total of $25.21 billion (€20.5 billion) in new commitments last year, the largest sum the industry has raised since the industry amassed $38 billion in 2001.

Mark Heesen, president, National Venture Capital Association

The 2005 sum represents a 46 percent increase over the 2004 number, even though fewer firms were actually out fundraising. According to the data, in 2005, there were a total of 182 funds raised, versus 194 vehicles raised in 2004. The contrast speaks to a movement by VCs to actually turn away capital, rather than fill up on all that is offered.
“Many firms with solid track records actually turned away money this year once they reached their targets,” NVCA president Mark Heesen said in a statement.
“This supply and demand dynamic has several forward-looking implications,” he added, citing that firms are being more selective in exactly whom they bring into their funds. That, Heesen noted, “does not bode well for the public funds”.
One aspect that may have come as a surprise was that while the market was certainly more flush than past years, the number of debut funds came in at the lowest level since 1994. Only 43 new funds were raised last year, according to the data.

The aborted effort of Tejas Venture Partners is representative of some of the hardships new firms can face. The Austin, Texas-based firm, whose partners spun out from Austin Ventures, reportedly fell well short of its $75 million target and ultimately decided to close shop in light of the miss.
At the other end of the spectrum was Technology Crossover Ventures. The firm corralled $1.4 billion for its sixth fund, representing the largest sum raised by one fund last year.
What was typical in 2005, however, could be described as bridled enthusiasm. Canaan Partners, for instance, raised $450 million for its seventh fund, a vehicle that finished fundraising roughly $100 million oversubscribed, yet still $250 million below its predecessor vehicle.
It remains to be seen if venture capitalists will continue to show that kind of restraint as 2006 progresses.