Venture firms collected more money last year to help keep them in the game.

February 9, 2006

Venture capital firms raised 19 percent more money last year than in 2004 as they moved to maintain their stake in portfolio companies that are taking longer to either go public or get bought, a study said Thursday.

In 2005, VCs raised $22.16 billion, up from $18.6 billion in 2004, according to VentureOne.

The bigger amount was spread over fewer funds. Some 108 venture firms raised funds in 2005, down from 116 in the previous year.

The funds are expanding to help venture firms maintain a stake in startups that are holding out for a favorable exit market. “We have to stay with our companies longer,” said John Jaggers, a general partner at Sevin Rosen.

Mr. Jaggers helped his firm raise a $305-million fund in 2004, while many top-tier venture firms were still investing the mammoth funds they collected during the dot-com era. “We were blown away by the pent-up demand in 2004,” he said.

But as more of the best VC firms start collecting cash, the flow of dollars may slow. Limited partners, or the institutions that give venture firms money to invest, can now put their money to work at any of a number of well-regarded VC firms. “It’s turned into a time when LPs [Limited Partner investors] can be pickier,” said Mr. Jaggers.

But the funds VCs raise have been growing. The median fund size increased some 26 percent to $200.5 million, up from $158.5 million in 2004.

They need the money to maintain their level of ownership in startups that keep upping the ante by raising more money instead of going public. “If you’re sizing a fund today, you have to think of that whole liquidity cycle,” Mr. Jaggers said.

Lackluster Exit Market

Indeed, the exit market for venture-backed startups did not fare well in 2005. Initial U.S. public offerings fell by 39 percent, to 41 during 2005 from 67 in 2004, according to VentureOne (see 2005: Fewer IPOs, Fewer Deals).

The companies that went public collected $2.2 billion from their offerings, down 56 percent from the $4.98 billion raised in 2004 (see Big Deals: IPOs).

Acquisitions also dropped. The number of venture-backed startups bought out fell nearly 14 percent to 348, down from 404 (see Big Deals: Venture M&A).

The modest exit market may be forcing VCs to invest their money more carefully. Last year, VCs invested only 2 percent more than in 2004, putting $22.1 billion into their startups compared with the $21.6 billion invested in 2004.

The National Venture Capital Association recently reported slightly different numbers, which showed a larger uptick in fundraising than VentureOne’s report.

In the NVCA study, some 182 venture firms raised $25.2 billion from investors in the same year, up 46 percent from the $17.3 billion raised by 194 firms during 2004 (see Buyout Funds Set Record in ’05).