Fewer Funds Raise More Capital as Venture Industry Contracts Around “Brand Name” VCs

7/11/11Follow @bvbigelow

The U.S. venture capital industry is raising more capital for fewer funds so far this year, continuing a contraction in the number of venture firms, according to a couple of rival surveys released today.

While the $2.7 billion raised by VC firms during the second quarter marked a 28 percent increase over the $2.1 billion raised during the same period last year, the 37 venture funds that raised capital represented a 23 percent decline from 48 funds in the second quarter of 2010, according to Thomson Reuters and the National Venture Capital Association (NVCA). That’s the lowest number of funds raising capital in 16 years, according to the NVCA.

Half of the $2.7 billion raised during the quarter came from commitments to two funds managed by Accel Partners of Palo Alto, CA—Accel Growth Fund II, which raised $875 million and Accel XI, which raised $475 million.

In a statement from the NVCA, president Mark Heesen says, “While a smaller venture industry will intuitively produce higher returns, it is critical that the mix of funds remain geographically diverse and cover a broad base of industries if we expect to contribute to economic growth and innovation at the levels we have historically.”

“Brand name” venture firms raising new funds attracted a much bigger proportion of capital from limited partners, which include college endowments, pension funds, insurance companies, and other institutional investors, according to a semi-annual survey from Dow Jones LP Source. “This year and next will be make-or-break for scores of venture capital firms in search of new funds,” said Scott Austin, editor of Dow Jones VentureWire. “Limited partners have made it clear they’re in no mood to back underperforming firms, so the competition for capital will be fierce.”

Dow Jones said 50 venture funds raised a total of $8.1 billion during the first half of 2011. That’s a 20 percent increase over the $6.8 billion raised during the first half of 2010, but a 38 percent decline from the 81 venture firms that raised capital during the same period.

Seven firms were responsible for raising $6.3 billion, or almost 80 percent, of the $8.1 billion in capital raised during the first half, according to Dow Jones, which identified the seven as Insight Venture Partners, JPMorgan Chase, Bessemer Venture Partners, Accel Partners, Sequoia Capital, Greylock Partners, and Summit Partners.

The survey released by the NVCA and Thomson Reuters reports that U.S. venture capital fundraising during the first half of 2011 totaled $10.2 billion from 76 funds. That’s a 67 percent increase over the $6.1 billion in capital raised that the NVCA counted during the first half of 2010, but a 15 percent decrease from the 93 funds that raised capital during the same period. The rival surveys use different criteria in their surveys, but the overall trends are usually comparable.

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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