Capital Markets

VCs Cashing Up — But Not Out

Despite lousy returns on existing investments, venture capitalists are quietly raising a ton of cash.
Alix StuartAugust 31, 2001

If you think venture capitalists aren’t already planning for the economic recovery, consider this: VC firms raised $27.8 billion from limited partners in the first half of the year, according to new figures released by VentureOne Corp. If that pace continues, 2001 would turn out to be one of the top fund-raising years on record for venture capitalist. ”While valuation and liquidity news is sobering for entrepreneurs,” says Dave Witherow, VentureOne’s CEO, ”it’s important to remember that venture capital firms are still raising money at a healthy pace.” Last year, limited partners poured $72.3 billion into funds — an all-time high.

The new figures are even more remarkable given the recent returns on VC investments. Valuations of venture-backed companies have dropped to a two-year low, as traditional exit routes have closed. Eleven percent fewer companies received funding from VCs last quarter than in the first quarter, according to VentureOne. Those investments didn’t do so hot: the value fell 21 percent.

With stock markets still floundering, exit routes for VC investors remains blocked, Only four venture-backed companies made it to the IPO market in the second quarter, while deal-making volume among such companies dropped 14 percent compared to the first quarter.

Intriguingly, a fledgling secondary market for venture fund holdings is emerging. That market may offer limited partners and other venture cap-backers a way to cash out their private equity investments. A startup called Private Trade is trying to help institutional investors find buyers online, while New York Private Placement Exchange is opening up a similar forum for private and corporate investors, as well as institutional investors.

More cohesive marketplaces for private would offer first-round investors more liquidity, which in turn, would make it easier for VCs to raise funds. The rise of these secondary markets are also causing institutional investors to scrutinize venture capitalist partners more closely, says Private Trade CEO Kathleen Dunlap.

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