Fewer Venture Capital Donors

Fundraising for Firms in Washington Area Hits 5-Year Low

Venture capital fundraising in the Washington region has fallen to its lowest level in five years, including a third quarter in which no firms reported raising any new money from investors, according to a study by Thomson Reuters and the National Venture Capital Association.

All told, Washington area venture capital firms raised slightly more than $500 million during the first nine months of the year, according to the study. That is the lowest amount for the period since 2004, when more than $400 million was collected.

The drop-off is attributable to several factors, including the dramatic fall in stock prices. As the stock market crashed over the past year, institutions that invest in venture capital saw their carefully balanced portfolios become erratic.

The portion of those portfolios devoted to stocks and other liquid investments dropped dramatically as investors rushed to sell securities to cover pension and other obligations. But the portion dedicated to venture capital and private equity did not experience such a precipitous drop because they tend to be more difficult to sell on short notice.

The result was that many investors stopped putting money into venture capital in order to allocate more toward cash and other liquid, short-term investments.

"A lot of institutional investors like pension funds and universities found themselves overweighted in private equity and venture capital," said Jack Biddle, a general partner at Novak Biddle Venture Partners in Bethesda.

Venture capital firms raise money by asking investors such as universities, endowments and pension funds to commit money to a specific venture fund. As the fund finds promising start-up companies or other businesses, it calls on those investors to make good on their cash commitments.

Channa Brooks, a spokeswoman for the National Venture Capital Association, said there may have been some venture capital fundraising in the Washington area in the third quarter that has not been reported because of the cyclical nature of fundraising.

"Part of what we're seeing is the natural ebb and flow of the VC fundraising cycle," Brooks said.

Biddle said another reason investors are reluctant to commit new money to venture capital is because the number of high-return investments has not kept pace with the growth in venture capital over the past decade.

"The returns in venture have not been very good since 1998," he said.

The same slowdown in venture capital fundraising has occurred on a national level, with $1.56 billion raised in the third quarter, according to the NVCA. That is the lowest level since the first quarter of 2003.

"It could be five to 10 years before the industry returns to where it needs to be," Biddle said.