Venture capital fund raising at seven-year low

BY DAVID SPEAKMAN

Although Silicon Valley still grabs the lion’s share of startup money, a new study shows venture capital investment nationwide continues to lose steam.

San Francisco-based private equity watcher VentureOne says third-quarter venture investment fund-raising of $1.2 billion was at its lowest level since the second quarter of 1995 when only $520 million was raised.

VentureOne says less money was raised because funds are investing less in startups.

“That fund-raising drop is not due to a lack of capital,” says John Gabbert, VentureOne’s vice president of worldwide research. “There is still a tremendous amount of money available.”

He says there are many healthy VC funds sitting on billions of dollars and that will affect Silicon Valley.

As in the past, “a good portion of the funding — about 51 percent — goes to Silicon Valley and California,” Gabbert says. But those investment dollars are shrinking.

On thing possibly spooking new investment is that valuations of existing venture-backed companies seeking additional funding continued to fall in the third quarter.

VentureOne says the median pre-money valuation of such firms was about $10 million — a drop of $1 million in three months. Those are levels not seen since 1996.

With these figures, it’s not hard to understand why funds would rather keep their equity in money markets than investing in businesses where on average first and second round investments are losing value.

“It’s a terrible climate,” says Tim Williams, CEO of Somerset, N.J.-based storage technology maker Tacit Networks, which plans to market its products to Santa Clara’s Hitachi Data Systems and Palo Alto-based Hewlett-Packard Co.

“It was hard to find investors,” Williams said after Tacit closed a $7.3 million first round of funding Dec. 9, “but those [VC firms] that did invest made their decisions fast.”

“I think it’s fair to say the long-term impact hasn’t been realized yet,” Gabbert says.

“As the decline of funding sets in and fewer startups receive financing,” he says, “it will have a ripple effect on the region — especially for an economy that relies heavily upon business and innovations from early stage and new tech companies.”

Gabbert says the current drop in median first and secondary rounds of financing is hitting most companies — even successful companies with solid business models.

That, he says, could mean fewer Bay Area jobs as companies with good, vigorous ideas are being stunted like bonsai trees.