VC fund-raising in US market takes a breather

VC fund-raising in US market takes a breather

Venture capital investing in the country is on a high at the moment, but there may be a spot of concern in the coming months. Fund-raising in the world’s largest venture capital market, North America, has slowed down and will likely decline further into 2008, according to latest forecasts by the National Venture Capital Association (NVCA), the premier trade association that represents 480 US venture capital firms. This includes early, growth and later stage funds and excludes buyout and mezzanine funds.

Research released early last week by NVCA, in collaboration with Thomson Financial, shows that in the first nine months of 2007, venture capital funds raised $20.66 billion (Rs82,227 crore) against $26.27 billion during the corresponding period in 2006.

Fund-raising has declined quarter-on-quarter, with the biggest hit coming in the second quarter of the year—only $8.95 billion was raised in the April-June 2007 quarter against $14.12 billion in the same period last year.

But there’s also some encouraging news. Even as the overall fund-raising momentum slows down or corrects, venture capitalists have intensified their focus on start-up companies, specifically in the third quarter.

Out of the 59 new funds raised in this period, 26 were early-stage funds. This augurs well for India, which is experiencing a recent boom in start-up and early-stage investing after nearly three years of nearly zero activity.

The slowdown in the US corresponds to a similar correction in the Indian venture capital fund-raising environment. Though the fraternity here does not admit so officially, new fund teams entering the market in the last nine-odd months have found it increasingly difficult to close India-dedicated funds.

This does not mean that confidence in the Indian market is waning, but when fundraising in the US market—still the chief source of funds for the industry here—slows down, the trickle-down effect here is pretty quick.

However, India, followed by China, does remain a key focus market for US venture capitalists and though we may not see a lot of new funds being raised here, investors are likely to continue to deploy funds quite consistently on a case-by-case basis.

Also, while dedicated India funds may be out for now, India allocations are still in vogue. For instance, one of the largest funds raised in the US in the third quarter—the $1 billion Bessemer Venture Partners VII, LP fund—has allocated $350 million for investment in India.

Snigdha Sengupta is Mint’s resident expert on private equity and venture capital.

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