VC Funding Dollars Drop 33 Percent In Q2: Report

The dollar amount raised by U.S. venture capital firms in the second quarter of 2013 decreased by 33 percent compared to last quarter, according to a report Tuesday by Thomson Reuters and the National Venture Capital Association (NVCA).

Though the number of funds, 44, remained the same, the almost $2.9 billion raised in venture capital funds marks the lowest quarter in terms of dollars since the third quarter of 2011, according to the report.

At the same time last year, venture capital funds were 54 percent higher than the current rate -- and over half of the current $2.9 billion was raised by five of the 44 funds this quarter, the report said.

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Those leading this quarter's fundraising included Matrix Partners X with $450 million, Scale Venture Partners IV with $300 million and Foundation Capital VII with $282 million, according to the report.

Mark Heesen, president of the NVCA, said in the report that the decline in funds reflects consolidation of the venture capital industry as well as an overall contraction in the size of funds.

’Many long-standing, pedigree venture firms are heeding the guidance from limited partners and raising smaller, more agile funds," Heesan said in a statement. "Consequently, dollar values of capital under management are declining from historical levels."

Steven Dietz, a partner at Upfront Investment, formerly known as GRP Partners, a Los Angeles-based investment firm, told CRN that he didn't think the numbers indicate anything in terms of trends because they measure too short of a time period.

"Ninety days doesn't tell you much," Dietz said. "If you had a single billion-dollar close [one day after the end of the quarter], it would swing the numbers completely."

Despite the analysis that Tuesday's report showed a trend in consolidation, Dietz said he argued that the math didn't follow that trend, but rather a shift in focus.

"Most money is going into the very large funds and a fairly large amount is going into seed stage funds -- very little is focused on the first institutional round," Dietz said. "Most of the money coming into the industry funds comes from larger pension funds who, by virtue of their size, need to make bigger commitments."

Walter Delph, CEO of Adly, a Los Angeles-based ad-tech platform company that recently secured $2 million in capital funding from Upfront Investment and others, said that raising funds last quarter was not easy, but was "on-par" with previous efforts.

"I would say raising the capital for the business that I'm in was moderately challenging," Delph said. "I think that there is a weaning out of a lot of companies that have been funded early on that they're not necessarily being backed by the same [funds]."

While Southern California's tech market is still growing, Delph said there remains visible movement to certain funds over others.

"I think the most interesting thing is the amount of funds getting capital," Delph said. "The money flowing to venture is clearly the bulk [and] you can see that the amount of players getting the money is trending downward."

NEXT: What Does This Mean For VCs?

While some might see the drop in the amount of money invested in venture capital as a sign of bad times, Venky Ganesan, managing director of Menlo Ventures, a Menlo Park, Calif.-based investment firm, said that it ironically makes it a great time to invest.

"The smart money is realizing this," Ganesan said. "The popular money rushes in at the wrong time and leaves at the wrong time. You want to zig where others are zagging."

Because of the way investors think, the numbers don't always indicate the best seasons to invest, according to Ganesan.

"The supply of capital into this asset class is declining just as it is turning out to be one of the best times to be in venture capital," Ganesan said. "This isn't surprising because instead of buying low and selling high, investors tend to sell low and buy high."

Ganesan holds high hopes for the next decade of investing due to the market of instant gratification, he said.

"We think the next 10 years are going to be the best time to invest in venture capital because the 'right-now economy' is going to result in great returns to everybody," Ganesan said.

Heesan of the NVCA said in the report that despite the dollar drop in capital investments, another trend is also at work that could potentially raise the amount of future funds.

"Counterbalancing this trend is the recent uptick in the venture-backed IPO market," said Heesan, "which, if sustainable, may very well draw more dollars into the asset class in the coming year."

Adly's Delph said a proven track record or unique value proposition will always draw the most attention.

"A strong product, technology team and a strong operations team with a proven track record in execution is really the best recipe for success in terms of capital raising," Delph said.