Venture funds slimming down

By Jim Hopkins
USA Today

SAN FRANCISCO — For the first time since 1970, venture capitalists are returning more money to investors than they are taking in.

Thirty venture capital funds raised $1.8 billion in the second quarter to invest in young companies. But seven funds returned $2.7 billion to investors, according to the National Venture Capital Association. Why? They can't generate even enough profits to offset the management fees paid by investors.

That's a huge change from the late-1990s, when investors in venture capital funds earned an average of 54 percent a year during the tech boom. And it doesn't bode well for the shaky economy, because venture capital firms, who invest for institutions and wealthy individuals, fuel startups that create jobs.

NVCA President Mark Heesen said the big kickback might have been a one-time event. The firms returning money had billion-dollar funds. Most firms have smaller funds, and can better manage them to avoid returning money.

Accel Partners, whose investments have included RealNetworks and Veritas, returned $950 million of a $1.4 billion fund raised two years ago.

The Silicon Valley firm realized it would take five or more years to invest the money in new enterprises — longer than the four-year timetable promised when the fund was created, said Alan Austin, general partner and chief operating officer.

Charles River Ventures returned $750 million, leaving it with $450 million. Many investors were relieved to get their money back, said general partner Ted Dintersmith.

As at other firms, some investors worried that Charles River might feel pressured to make ultimately bad investments in startups, Dintersmith said.

Another cause for relief: Venture capital investors won't have to pay annual management fees of 2 to 3 percent — as much as $15,000 on a $500,000 investment — whether or not money is being pumped into startups.

By acting conservatively, venture firms stand a better chance of keeping investors happy — and more likely to invest again when the startup market rebounds, said Gary Stroy, managing director at Walden International, which returned about 20 percent of a nearly $1 billion fund raised a year ago.

Venture capital firms still have nearly $100 billion in uninvested capital. At their current pace, they'll invest $20 billion by year's end, the NVCA says. Much of it will go toward keeping alive ventures that the funders had hoped to take public.

The initial public offering market has nearly collapsed. There have been 56 IPOs this year, compared with 302 in the first seven months of 2000, when the dot-com frenzy was peaking, according to IPO.com.