March 31, 2005--After three years of decline, U.S. venture capital fundraising doubled in 2004 even as VCs grappled with investing all the funds raised earlier, according to a survey compiled by VentureOne, the publisher of VentureSource.
Fundraising in 2004 touched $17.5 billion and was on par with the 1997 level.
The influx of fresh capital raised last year, notwithstanding, there is still an estimated 20% of funds ($53.6 billion) raised since 2000 that needs to be invested. This capital overhang is the result of VCs holding out to make any follow up investments on companies they already have a stake in, or the for new ventures that have yet to catch their attention.
About $32.7 billion, or more than half of the capital overhang, has been earmarked for new portfolio companies, said VentureOne.
"VCs work on a five-year investment period. There was a huge investment in 2000 and then a slowdown," said Brad Feld, managing director, Mobius Venture Capital. "Since then funding has picked up and the overhang is because VCs are holding out for the rest of the investment period."
After a brief slowdown in 2001, Mobius bounced back to investing in new ventures, especially in RSS, consumer-related products, and technology and IT infrastructure.
According to Mark Heesen, president of the National Venture Capital Association (NVCA), a number of late-stage companies are now ready to be acquired and VCs may be holding out to invest their funds in making final investments in those start-ups.
The year 2000 was the largest fundraising year on record with $82.6 billion in venture capital invested in nearly 5,500 private companies, many of which are now seeking follow-on investments.
Not surprisingly, all of the remaining year 2000 capital is committed to follow-on investments in existing portfolio companies, according to VentureOne's survey.
VentureOne surveyed active venture capital investors and analyzed the current status of 1,129 funds raised since 1999. The analysis found that 1999 funds raised are almost completely called down.
But younger funds still have a high percentage of capital that is yet to be invested. Of the funds raised in 2004, 85% is yet to be invested compared to 64% of the amount raised in 2003 and 33% raised in 2001.
Funds raised three years ago still have a significant amount set aside for new investments. According to the survey, 15% of 2001 funds remain set aside for new investments compared to 50% of 2002 funds, 60% of 2003 funds and 85% of 2004 funds.
"The amount of funds available to support new investments indicates investors remain optimistic about the landscape for funding the innovative startups of tomorrow," said John Gabbert, vice president of worldwide research for VentureOne.