January 10, 2013
Is that the Fat Lady?

One of the more interesting press releases from the National Venture Capital Association (NVCA)
is the VC Quarterly Fundraising announcement which came out the other day
for 4Q12. The data serves as a weathervane for the industry, indicating
how much capital was raised – by firm, by geography, by investment

For a reasonably extended period of time – over the past four years –
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 (but that has
not happened). This imbalance is not sustainable.

The headline for this past quarter was quite positive; 42 funds
raised an aggregate of $3.3 billion, which meant for all of 2012 $20.6
billion was raised by 182 funds, which compares favorably to 187 funds
and $18.7 billion in 2011. Notwithstanding the more modest 4Q12 activity
($5.1 billion was raised by 56 firms in 3Q12, $6.2 billion by 54 firms
in 4Q11), that felt understandable given the concerns and distractions
surrounding the election and fiscal cliff, and frankly, the continued
lack of meaningful and consistent liquidity. But some of the details
buried in the data provide a more nuanced picture of 4Q12 fundraising

  • The largest fund in 4Q12 was Sequoia’s $700 million Growth fund,
    which interestingly is only the ninth largest fund raised in all of
    2012. The second largest fund in the quarter is only the 16th largest fund for the year. Clearly funds continue to trend smaller in size.
  • The top 5 funds accounted for 56% of all capital raised; the top 10
    accounted for 75%. Clearly continued concentration of managers.
  • 17 funds were classified as “new” while 25 were “follow-on.”
  • Of the top 10 funds, one is in New York, none are based in Boston,
    two are healthcare, and two are deemed “new” – which is perhaps somewhat
    misleading – NovaQuest Capital (~$250 million) is the investment team
    from Quintiles which had been investing together since 2000 (in fact the
    fund is labeled “III”) and Costanoa Venture Capital ($112 million) is
    reported to be constructed with a number of existing positions spun out
    from Sutter Hill Ventures.
  • The average size across all 42 funds is $78 million but the median is $24 million.
  • The average size of “new” funds (including NovaQuest and Costanoa)
    is $34 million; excluding them the average drops to $14 million.
  • Of the 42 funds, 13 are less than $5 million in size while 5 are less than $1 million!
  • Many of the funds raised this past quarter appear to be “side car” funds of existing, longstanding venture firms.

Consistent returns and liquidity should reverse the fundraising
trends driving the VC industry to be smaller and more consolidated.
Given the strength of the public markets over the past year the overhang
of the “denominator effect” should also be less of a concern in the
near to medium term. Unfortunately it may take time for many LP’s to
adjust their portfolio allocation models to increase exposure to VC. But
that will happen. Hopefully the news in 90 days will hint at that.

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