Figures published by the NVCA in association with Venture Economics show that US venture capital fundraising is undergoing a major downshift following the bumper fundraising totals achieved over the past four years.
Results for Q2 2002 show that for the first time in 40 years, venture capital funds returned more existing committed capital to their limited partners than was raised in new funds. Seven firms returned a total of $2.7bn to LPs, compared with a total fundraising of $1.8bn for the same period. The combined figures give a fundraising total of minus $887m, a significant net outflow of VC capital that affirms the depressed sttae of the VC market in the US.
Those who are returning funds have realised that current market volatility makes it nigh-on impossible to effectively and profitably invest billion dollar funds. The major cutbacks took place at some of the most established firms in US venture capital, including Accel Partners, Walden International and Austin Ventures.
VC firms are quick to point out though that smaller funds will not prevent them from making a comparable number of investments on account of the drop in company valuations. However Jeanne Metzger, vice president of the NVCA believes that reduced dealflow could still complicate the investment process. “It will be difficult to sustain dealflow because the pipeline has diminished and there has also been a drop in the number of entrepreneurs willing to take a risk on establishing new companies.”
The NVCA has been keen to emphasise the ‘rightsizing’ and ‘positive restructuring’ that has gone on in the US venture capital industry this year as firms respond to the present economic climate. “To a certain degree, the reduction in fundraising is not such a bad thing as it puts to an end the unsustainable growth that typified the past few years,” adds Metzger. “The current levels of fundraising represent a retraction to more sustainable levels.”