Venture capital’s growing aspirations
(BusinessWeek Feb 5, 2007)
Some of the biggest venture capital firms are raising large funds, targeting more established companies, and increasingly setting their sights abroad. That’s the finding of recent research by Dow Jones (DJ) VentureOne.
Oak Investment Partners and New Enterprise Associates raised the two largest venture funds ever last year—at $2.56 billion and $2.5 billion, respectively, according to VentureOne. Overall, the percentage of funds that closed last year worth $500 million to $1 billion doubled from 2005, to 12.1%. And 4.4% of funds raised last year topped $1 billion, up from just 1.6% the preceding year. Consider the percentage of new funds under $100 million: It dropped to 34% last year from 71% in 2002. The median fund size was $200.5 million last year, compared with $153 million in 2004.
The upshot? Some venture capitalists are starting to resemble private equity investors, looking for fast growth from their more established portfolio companies instead of doing the spade work of assembling a management team, evangelizing a product, and building a market—tasks often associated with nurturing the fledgling companies that VCs typically target. The concern for some is that innovation will be undermined as investors shun risk in favor of surer bets.
The evolution is partly a response to the tepid market for initial public offerings and lower tech stock prices that hamper the ability to merge and acquire. It also reflects the boom in private equity investments, which reached a record $660 billion last year. At a time when private equity firms are cleaning up, some VCs want a bit of the luster.
Bigger funds also can mean larger investments. The sweet spot for stakes taken by firms with the largest funds is now between $20 million and $50 million, compared with the $1 million to $10 million investments VCs traditionally take in startups, says Venrock’s Roberts.
None of this is to say seedling companies aren’t luring cash. But picking winners among startups is harder than ever, and some firms are increasingly looking abroad.
Draper Fisher Jurvetson manages a little more than $4 billion, but it’s spread across 19 funds and run out of 33 offices from Boston to Beijing. Regional managers can often spot opportunities more quickly than those in charge of “monolithic funds”, says Ravi Belani, an associate at DFJ.
The hunt for more capital-intensive, later-stage investments and promising startups in the booming markets of India and China is causing fund managers to make tough choices. Venture funds between $400 million and $700 million are often too polyglot to compete with smaller, sector-focused funds, but not quite big enough to cover the plane-hopping and branch offices required to forage for opportunities in Asia. So the pension funds and university endowments that put up the money during fund-raising are looking at the ends of the spectrum, not the middle.
To be sure, investment in U.S. startups is still rising. Venture capital investments in U.S. companies rose 8%, to $25.75 billion in 2006, according to Ernst & Young and VentureOne.
