VC-Fueled Startups See Bigger Deals, Fewer Funds

Startups looking for angel investments so far this year were seeing larger checks but fewer funds ready to dole out the dough.

That's the finding of a quarterly survey released Monday by Thomson Reuters and the National Venture Capital Association. A mere 40 venture capital funds raised $4.3 billion in the first quarter of 2009, the report found. The numbers represent the smallest number of venture funds raising money in a single quarter since the third quarter of 2003.

The upside? That $4.3 billion is a healthy increase over the previous quarter when $3.5 billion was raised.

"The first-quarter fundraising data suggests two distinct dynamics currently taking place during the economic downturn," said Mark Heesen, president of the NVCA. "First, the majority of venture firms are not actively fundraising at this time because they have either recently raised a fund and are investing those dollars or are waiting until market conditions improve. Second, despite the recession, venture firms with solid track records continue to be able to secure sizable commitments from limited partners as there remains a great deal of promise for future returns from the venture capital asset class."

The largest fund raised in the first quarter was $650 million as part of a balanced-stage fund by firm August Capital Management. That was followed by $475 million in a similarly balanced structure by Bain Capital Ventures.

Clearly, the market's collapse played a part in preventing startups from getting proper funding, Thomson and NVCA found. Just three new funds and 37 follow-on funds were raised in the first quarter. That's a ratio of more than 12-to-1 of follow-on to new funds, compared with 6-to-1 in the first quarter of 2008. A "new" fund is defined as the first fund at a newly established firm, although the general partner of that firm may have previous experience investing in venture capital.

Two examples of this follow-on funding include Cooliris, a developer of software designed to help users more easily navigate images, video, and other media content, and Reflex Systems, a virtualization management and security software company.

Cooliris said it raised more than $15 million in its second round of funding from investors like Kleiner Perkins Caufield & Byers, DAG Ventures, the Westly Group, and the T-Mobile Venture Fund. The company on Monday also announced the release of its new application, Cooliris Wall, which allows users to scan a 3-D wall of content from either Web sites or a PC. The application gives more of a visual presentation to search for content on sites like YouTube, Hulu, and Facebook.

Also this week, Reflex Systems said it has secured $8.5 million in Series A funding led by RFA Management, an Atlanta-based private investment firm. The deal marks the final step in the company's reorganization. The company's Reflex VMC (Virtualization Management Center) security software includes dynamic policy enforcement for use throughout a data center, whether the virtual resources are hosted locally, remotely, or in a cloud environment.

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