So Many Venture Firms, So Little IRR

While venture firms may be having trouble finding quality deals into which to put their money, the same is apparently not true for LPs in venture funds. New funds are being financed in droves, with there being more venture funds in the U.S. at the end of 2004 than there were at the peak of the technology boom back in 2000:

Legal sources that work with venture capital firms, mostly in the US, report a surge in fund formations. According to the NVCA/Thomson Venture Economics, the year 2004 saw 170 funds raise $17.6 billion – $3.4 billion more than the previous two years combined.

Terms for many of these funds remain exceedingly GP-friendly. Groups that got 30 percent carry during the boom still get 30 percent. Some managers that got 20 percent carry for their last fund are now asking for 25 percent after certain performance hurdles.

…The demand has given new life to venture capitalists who were otherwise marginalised by the tech crash. Take Union Square Ventures, a new firm that reportedly has raised more than $100 million. Among the firm’s founders is Fred Wilson, formerly of Flatiron Partners, a JP Morgan Partners venture affiliate that invested during the Internet boom from 1996 until the summer of 2000, when its offices were shut and investment activities halted.

…Many of the teams raising capital now have previous funds that are deeply under water. Most of these are first-time funds. With average performance in negative territory, it will be interesting to find out what investors ultimately consider a strong track record among this crowd. If the barrier to entry to the venture capital business is as low as having simply once worked for a venture capital fund, brace yourself for further VC proliferation.