Let the Good Times Roll?

Monday Apr 21, 2014 by Michael Greeley - General Partner, Foundation Medical Partners

Earlier this week the National Venture Capital Association (NVCA) released the VC Quarterly Fundraising data for 1Q14. The expectation was for this past quarter to be a strong quarter for fundraising, given the (until recently) buoyant public equity markets and strong M&A environment which drove a lot of liquidity back to LP’s. But the headline number was quite a bit greater than many expected. Notwithstanding what investors might say, the level of fundraising is arguably a function of recent market action and investor sentiment – which is directly related to LP liquidity.

The headline for this past quarter was very positive – 58 funds raised an aggregate of $8.9 billion, which blew away 4Q13 of 53 funds and $4.9 billion raised. In all of 2013, 191 funds raised $16.9 billion which was consistent with the prior five years where plus or minus 175 funds were raising between $15 – $20 billion each year. But I am not sure one should now conclude that annualizing 1Q14 performance (where 230 funds will raise $35 billion!) is what to expect for this year.

Since 2008 the VC industry has been investing more capital than it has been able to raise in new funds. I have been worried that this dynamic will end abruptly (i.e., badly) as one would logically conclude the investment pace needs to dramatically slow as firms invest the balance of their funds. Or fundraising would increase materially. This imbalance is not sustainable. Notably we also learned this week that VC’s invested $10.7 billion in 1Q14, yet again exceeding how much was raised (the aforementioned $8.9 billion) – but at least the gap may be narrowing.

 

It is still a challenging environment for VC’s to raise new funds. As one stares at the data it is quite evident that the bifurcation of the VC industry continues apace – are we seeing the advent of only two predominant VC models: the “billion dollar firm” which is frankly focused on both a large number of investments and larger size investments and the smaller, more narrowly focused venture firm?

Some of those details buried in the data may provide insight into what is a more nuanced picture of 14Q14 fundraising activity…

  • Of the 58 funds raised this past quarter, four were greater than $1.0 billion in size.
  • This past quarter witnessed 33 funds raised by firms that had already raised a prior fund so therefore 25 funds were raised by “first time” firms – a nice indicator that the VC industry continues to be able to re-invent itself to some meaningful degree.
  • The largest of the new firms was $243 million
  • The top 5 funds raised $5.4 billion or 60% of all capital raised even though they represent just 8% of the firms which raised capital – continued concentration at the high end.
  • That phenomenon is even more acute when looking at the top 10 firms which raised $7.3 billion of the $8.9 billion (82% of the dollars) yet were only 17% of the firms – perhaps more troublesome for entrepreneurs staring at fewer larger firms as possible partners.
  • Of the 58 funds raised, 44 were less than $100 million in size – the average size of fund in this cohort was $27.5 million.
  • Let’s look at the other end of the market: 26 of the 58 firms raised funds were less than $10 million in size – ouch.
  • The bottom 10 funds totaled $8.4 million – yes, that is millions – so 17% of the firms which raised capital last quarter represented 0.09% of all the capital raised.
  • The largest fund raised ($1.38 billion) is 164x the ten smallest funds combined.

Does this mean anything really? Maybe not. Many of us are just thrilled that the VC industry seems to be able to once again raise capital, but what form this recovery takes will have significant implications for how we finance innovation. One question I wrestle with – is this concentration of capital leading to these multi-hundred million dollar “venture” rounds we are now seeing so routinely? Is that good?

An addendum: just announced – in 1Q14 all private equity firms raised $95 billion to put this into context…more than 10x that for venture firms. 

Michael Greeley is a General Partner at Foundation Medical Partners.  You can find this post, as well as additional content on his blog called On the Flying Bridge.

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