The Siren Songs

"History doesn’t repeat itself, but it sometimes does rhyme"
                                                                — Mark Twain

Here we go again. In Q1, we saw the highest median fund size raised on record according to Venture One (see the Venture Reporter excerpt below). It used to be said that an early stage venture group can’t deploy more than $300-400m and stay on investment style. The Siren Songs of large management fees are hard to resist.

In Greek mythology, the Sirens lived on an island surrounded by rocks. Their sweet songs would draw unsuspecting boats near, shipwrecking them on the rocks. Odysseus escaped this fate by tying himself to a mast and plugging the ears of his men. Unfortunately, most venture firms do not have masts readily available. During the heady bubble, at one point, there were over 30 venture firms with funds at or over $1B. During the ensuing crash, everyone repented and dropped either their current fund or their next fund down to a more manageable level. Venture Reporter recently published Q1 fund raising stats:

Though fewer VC firms, 17, closed funds in the first quarter of this year, they raised substantially more money, $4.26 billion compared to $2.5 billion by 22 firms for the same period a year ago. According to figures from Dow Jones & Co.’s industry tracker VentureOne, this quarter registered the highest median fund size on record, at $209 million compared to last year’s median fund size of $200.5 million.

Five funds, ranging from $400 million to $1 billion, were responsible for the bulk of the capital. Likely to sustain the growth are large funds still in the market like VantagePoint Venture Partners’s fifth fund and New Enterprise Associates’ next fund likely to close on as much as $2.5 billion in what would be the largest U.S. venture fund ever raised. And even if we’ve seen a few contrarian VCs launching small funds like Alan Patricof’s Greycroft Partners LP, only 31.25% of new funds raised in the past quarter were managing less than $100 million.

"Even in the heyday years of 2000 and 2001, there were at least 50% of the [venture capital] funds managing under $100 million," said Josh Grove, a research analyst at VentureOne

How quickly we forget. A few MySpace type exits and funds are back raising $700-$1B funds again. The good news is that most of the carnage was caused by a lot of small funds, run by inexperienced VC’s, that jumped into any deal they could find while paying irrationally high prices. This time, at least, most of the money is going to established funds. They are creeping later stage, either providing growth or founder buyouts on more significant companies. You see a lot of this in the interactive marketing space. That said, as I said in my "Black Art" post, their challenge is going to be maintaining adequate exit multiples on deals that they pump $20-30M into.