April 20, 2010

Venture Capital Fundraising Slowed in Q1 2010

U.S. venture capital fundraising experienced its slowest first quarter start this year since Q1 1993. Venture firms raised $3.6 billion from 32 funds during the first three months of the year, a 31% decline by dollar commitments and a 44% drop by number of funds compared with Q1 2009, according to an April 12 announcement by National Venture Capital Association (NVCA) and Thomson Reuters.

Of the active funds during the quarter, 27 were follow-on funds and five were new ones. NVCA and Thomson Reuters define "new" as the first funds at a newly established firm, even when the general partner has venture capital investing experience.

"There is no question that the bar has been raised for venture capital fundraising," NVCA's president Mark Heesen said in a statement. "Over the last two years, alternative asset allocations have declined and the exit market has suffered, putting venture firms in the unenviable position of communicating their value in an extremely challenging environment. Many firms have been waiting until the exit market improves before embarking upon their fundraising efforts."

In fact, the exit market perked up during Q1 2010. An NVCA and Thomson Reuters exit poll reported the best quarterly total for venture-backed IPOs since Q4 2007 and the best quarter on record for venture-backed M&A exits. The quarter ended with nine venture-backed IPOs and 111 M&A transactions. The 31 disclosed M&A exits had an average deal value of $180 million, 21% higher than the total average disclosed transaction value for all of 2009.

"The exit activity in first quarter of 2010 has engendered a cautious optimism within the venture capital industry," Heesen said in a separate statement. "The IPO volume, while not nearly enough to declare a recovery, has shown the most improvement since the financial crisis began and the pipeline of companies in registration continues to build. The record breaking number of venture-backed acquisitions is also encouraging as the quality of these transactions appears to have held strong."

Interestingly, three of the IPO exits during Q1 2010 were in the biotechnology sector, with Cambridge, Mass.-based Ironwood Pharmaceuticals accounting for more than half the total $310 million raised in IPOs during the quarter. On the M&A side, the information technology sector dominated, with 81 deals and a disclosed total dollar value of $2.3 billion.

Michael S. Fischer (msf7@columbia.edu) is a New York-based financial writer and editor and a frequent contributor to Wealth Manager.

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