Venture capitalists secured $11.2 billion for future investments during the second quarter, marking the industry’s biggest spike in fundraising in more than five years, according to data released Monday by Thomson Financial and the National Venture Capital Association.
The surge of new funds represented the largest wave of money to flood into venture-capital coffers in any three-month period since the first quarter of 2001, when VC firms raised $16.6 billion. Venture capitalists have raised $18 billion so far this year, a 41-percent increase from $12.8 billion raised during the corresponding period last year.
Interestingly, Oak Investment Partners raised $2.56 billion and New Enterprise Associates accounted for another $2.25 billion, representing nearly half the total. The remaining $6.4 billion accrued to 48 other funds.
Oak Investment Partners is a multi-stage VC firm with about $8.4 billion in committed capital, with an investment focus on communications, information technology, internet new media, financial-services-related information technology, healthcare services, and consumer retail. NEA focuses on the information-technology and healthcare industries, funding high-growth ventures from seed stage to IPO — though he latter is occurring less frequently and takes considerably more time than was the case during the boom that preceded the 2001 bust. A percentage of NEA’s latest venture fund, raised during the second quarter, is earmarked for expansion in the fast-growing technology sectors of China and India.
We know IPOs are occurring at merely a fraction of the pace they once did, and, with Sarbanes-Oxley and other forms regulatory compliance acting as inhibitors, it’s unlikely the halcyon days of prolific IPOs will be returning in the foreseeable future. So, what will the VC firms do with this boom-like tidal wave of cash? Do they have a coherent plan, or will they just hope to run up management fees while doing as little as practically possible?
Paradoxically, one theory suggests that the paucity of IPO exits is forcing VCs to pump more cash into their investment vehicles over longer durations of time. According to this theory, VCs are recognizing that it will take longer for exits to materialize, and they understand that they’ll have to put more rounds of money into their companies to get them to a point where an exit, either an IPO or an acquisition, becomes a reality.
Still, how long do VCs expect these companies to mature as investment vehicles? Are they looking at ten- or fifteen-year horizons? Are they really willing to wait that long?
It’s difficult to conceive of another bubble taking shape today, with the major vendors across the information-technology universe applying greater due diligence to prospective acquisitions while attempting to enforce heretofore unprecedented degrees of financial and operational rigor. It’s also difficult to understand how, even with longer time horizons requiring ongoing investments in existing vehicles, Oak Investment Partners and NEA can responsibly allocate the prodigious investment funds they’ve raised without making a few ill-advised bets in the process.