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VC funding hits all time low

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CIOL Bureau
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SAN FRANCISCO: In 2002, 108 venture funds raised $6.9 billion, well below the industry's record year in 2000, when 653 funds raised $106.9 billion, according to research firm Thomson Venture Economics and the National Venture Capital Association industry group.



The results also were well below 2001 levels of $40.7 billion raised by 331 venture funds and ranked as the lowest tally, when adjusted for money returned to investors, since 1991. The fourth quarter of 2002 was especially slow with only 31 venture funds raising $1.2 billion, compared with 92 funds receiving commitments of $5.5 billion in the year-earlier quarter.



The venture industry has been hammered by the dot-com crash, the long-running technology and telecommunications slumps and the stock market downturn. Sharply reduced demand for public offerings of start-up shares and a slower pace of corporate acquisitions using stocks to buy smaller, privately held companies backed by venture funds also has hurt the venture industry.



Additionally, investors are not in a hurry to place more money in venture funds, which have an estimated $80 billion in committed dollars to invest in privately held companies. With such an overhang and few opportunities to sell start-ups and their shares, some large venture funds have taken the unusual step of returning money to investors.



"Several large venture capital funds reduced their fund sizes in an attempt to balance their deal flow, staffing and exit prospects," the report by Thomson Venture Economics and NVCA said. "In 2002, 26 venture capital funds downsized their funds by approximately $5 billion."



"Accordingly, after taking these downsized funds into account, net fund-raising for 2002 was $1.9 billion, a level that has not been seen since 1991," the report noted.



Until venture capitalists make use of the $80 billion overhang, there will be little need this year and next to ask investors for more cash, said an NVCA official.



"We don't expect fund-raising numbers to go up in the near future because the industry needs to deploy the overhang," said Jeanne Metzger, a vice president with Arlington, Virginia-based NVCA. "Most venture capitalists won't be fund-raising until the latter part of 2004, or, more likely, 2005."



"They have sufficient resources to get them through the next year or two," Metzger told Reuters. "The pace of investing is back to mid-1990s levels. Historically, most funds would take three to four years to deploy their capital, and, I think, those rules now apply again."



© Reuters

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