2004: A Step in the right Direction?
The numbers are better, but thatÕs not saying much
Venture capital firms manage venture capital funds. Let me explain.
For example, Adams Capital Management, manages three venture capital funds ACM I, ACM II and ACM III that total over $700 million.
OK, so the process starts with venture capitalists raising money from institutional investors. Where does $17.6 billion fit in the overall scheme of things? LetÕs take a look at the high and low points of recent years.
1989 Peak $5.6 billion
1991 Trough $1.7 billion
1994 Rebound $7.6 billion
1998 Internet infancy $29.4 billion
2000 Internet BOOM $106.1 billion
2002 Internet BUST $3.7 billion
2004 Return to normalcy? $17.6 billion
LetÕs say itÕs encouraging. The extreme swings of recent years, and their consequences, have caused a suspension of ÒnormalÓ behavior by venture capital funds, particularly in their avoidance of early stage companies.
Almost 75% of the capital raised went into follow on funds (Roman numerals), meaning that it is still extremely difficult for new partnerships to get traction with institutional investors. For entrepreneurs, that means that the universe of potential investors arenÕt likely to have changed, but perhaps they will have new funds from which to invest.
Locally, Draper Triangle had an initial closing on its second fund in 2004, and PA Early Stage closed its third fund and opened an office in Pittsburgh. LetÕs hope that other venture capitalists are successful in raising new funds in 2005.
Venture capitalists invested:
I leave it you to decide whether you think things have improved appreciably.
ItÕs pretty sobering when you think about the size of the Pittsburgh Region in the context of these national statistics. Overall, weÕre probably behind our Òfair shareÓ of venture capital, deals and invested capital. Yet our collective aspirations require us to exceed our pro rata share, by a significant margin. WeÕve got our work cut out for us.
Frank Demmler is Associate Teaching Professor of Entrepreneurship at the Donald H. Jones Center for Entrepreneurship at the Tepper School of Business at Carnegie Mellon University. Previously he was president & CEO of the Future Fund, general partner of the Pittsburgh Seed Fund, co-founder & investment advisor to the Western Pennsylvania Adventure Capital Fund, as well as vice president, venture development, for The Enterprise Corporation of Pittsburgh. An archive of this series of articles can be found at my website.