VC Investors Pull In their Shell in Q2

August 6, 2002 ( - Not seeing much to their liking as they scoured the investment landscape, venture capitalists returned more money to investors during the second quarter than they raised, an industry report said.

Seven venture capital funds, which invest in young or struggling companies with potential to grow, returned $2.7 billion to their limited partners, according to a quarterly study made by financial publisher Thomson Financial and the National Venture Capital Association (NVCA).

The amount of money returned, much of it raised before the two-year-old bear market began, was more than the $1.8 billion raised by 30 funds during the same quarter. The net outflow is an unprecedented trend, according to Thomson.

By returning money that won’t likely be invested in the near future, venture capital funds allow limited partners to put that money to work elsewhere, Reuters said in a news report.

The report attributes the trend for venture capital investors to play things more conservatively to:

  • the stumbling economy
  • a lack of corporate spending
  • a tumble in stock prices
  • the dearth in initial public offerings and acquisitions cutting down possible options for early stage investors.

Among funds that reduced their size were Accel Partners, Austin Ventures, and Walden International, according to the report.

The trend shows that venture funds have ample cash for the next 12 to 18 month period, said NVCA president, Mark Heesen, in a statement. For that reason, the pace of new fund raising will likely continue to be slow.

The $1.8 billion of venture capital raised during the second quarter is slightly more than the $1.7 billion raised in the previous quarter, though is still far less than previous quarters during recent years.

Seventeen buyout and mezzanine funds, which typically invest once the company has grown to a larger size, raised $6.2 billion, up from the $5.8 billion raised in the previous quarter.
Eleven new venture capital funds raised $500,000 in the second quarter, according to the report.

A separate NVCA study found US venture capital spending was down 53% in Q2 and is headed for its worst year since 1998.  Of course, the $12.1 billion pace projected for 2002 would still be the fourth best year ever.