US firms look to scale back funds

US venture capital firms are increasingly struggling to hold on to the large funds raised before the technology crash.

A number of US venture capital firms are in the process of scaling back their investment activities as a result of a lack of opportunities in the venture capital sector.

The prevailing combination of a lack of investment opportunities and a reduced scope for successful exits has led a number of firms to scale back their operations. The latest addition to a growing band of US venture managers to take a long and hard look at the size of a fund is Californian venture capital firm Accel Partners which recently announced plans to split in half its $1.4bn 2000 fund in order to reduce investor costs at a time when investment opportunities are thin on the ground. Accel said the move would not involve a return of funds to investors, but Accel will dispense with its management fee on the second half of the fund until its activation in late 2003 or 2004.

Redpoint Ventures, a technology VC firm also based in California, said last week that it would reduce the size of its recent $1.25bn fund by 25 per cent. Earlier in March, Kleiner Perkins Caufield & Byers told investors that it planned to reduce its $630m KPCB Fund X by 25 per cent. In January, Mohr Davidow Ventures reduced its latest fund by about 23 per cent to $652m.

The current environment is proving to be prohibitive for managers of $1bn plus funds to justify management fees of between one and three per cent when there is a dearth of investment and, importantly, exit opportunities. VentureOne recently published a survey for US VC investment in the first quarter, which reveals that there were only four venture-backed IPOs in the US in the first three months of 2002 worth a total of $345m. VC-backed M&A deals totalled $1.5bn in Q1 2002, which represents a steady decline since mid 2000. In 2001, investment by venture capital firms in US companies dropped from a record $91.6bn in 2000 to $32.1bn, a 65 per cent reduction.

In February 2001, Venture Economics, a US-based economic research organisation, published figures showing that returns on venture capital investment have fallen to their lowest levels since 1969. In the 12 months to September 30 2001, one-year returns for all private equity, including venture capital, buyouts and mezzanine funds, showed a performance of -21.4 per cent.

Diana Robinson, vice president of VentureOne, believes that the current market is likely to provide managers with further headaches: “The M&A market is still the only viable exit avenue, but acquirers are increasingly unwilling to pick up the slack when additional private financing falls through.”