Fund raising:
The venture capitalists first priority is to raise capital for their funds (make sure they have a job), and the second priority is to find companies to invest in (generate enough return so that the investors stay happy and invest more in the future). In essence, the VC is a glorified middle man for investors that want to invest in risky but potentially high reward starup companies. The money for those investments typically comes from institutional investors (retirement funds, insurance, etc) and some wealthy individual investors. The typical VC firm is structured so that the top level managers interact with the investors, and spend a large portion their fund raising and managing the investments.
Both the Venture Capital and Private equity (buyout, LBO) asset class is funded by the same group of investors. Not just the same institutions (public pensions, universities, etc.), but also the same individual investment managers. Sometimes they are “private equity officers” and sometimes they’re “alternative asset officers.” At smaller shops they’re the CIOs.
What this means is that there buyout and VC firms are engaged in an ongoing competition for dollars and LP attention, even if neither side consciously realizes it. Buyout firms have obviously won the battle in recent years, with consecutive years of record hauls. Venture has risen steadily too, but not at nearly the same rate. In fact, it could be argued that venture fundraising has increased at a lower rate than have average LP allocations to venture. After all, why listen to pitches from a dozen VC firms looking for $20 million, when you can just plug the same $240 million into a mega-buyout fund?
What I’m hearing from LPs and placement agents now, however, is that 2008 could finally be the year in which VCs begin to even up this tug-of-war. Not in terms of total dollars, of course, but in terms of percentage change over the preceding year. The explanation for this (possible) shift is that the credit crunch has scared LPs silly, and they are worried that those giant checks could soon come back to haunt them. Venture, on the other hand, is being viewed as overlooked, and possibly offering more reward with less risk. Feel free to laugh at that last part – particularly if you’ve seen median VC returns since the Internet bubble – but it’s no sillier than stocking up on mega-funds that club up and charge outrageous transaction fees…
Fundraising data:
U.S.-based buyout firms raised $276.7 billion in fund capital last year, compared to $225.6 billion raised in 2006 (itself a record). Of this, $135.1 billion went to funds of $5 billion or more. U.S.-based venture capital firms raised $34.67 billion in 2007, compared to $31.7 billion in 2006.
read more from PEHub.com
Venture Capital Math Problem:
KookyPlan recommended reading: "A venture capital Math problem" from Fred Wilson, a VC and principal of Union Square Ventures.
Examples
Granite Global Ventures has expanded the size of its third fund from $400 million to $600 million. The expansion-stage firm invests in both the U.S. and China, but says that the extra capital will largely be used to focus on investments in Chinese companies that are driven by consumer growth. The firm also announced that it has hired four partners from Shanghai-based SIG Capital: Zhuo Fumin and Jessie Jin as managing partners, and Michael Kuan and Steve Chu as venture partners. The four will continue to manage their existing fund Venture Star Shanghai, while SIG Capital will officially become a Granite Global affiliate. source: peHUB
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