Super-size is the latest trend among venture capital shops that are still capable of raising funds in the current depressed economy. That's how I interpret recent developments such as the NEA's newly raised $2.5 billion fund plus a $1.2 billion fund for Norwest Venture Partners and $1.1 billion for Khosla Partners. More power to them!
Many firms along Sand Hill Road keep trying and trying to close new funds and capitalize on the ripe opportunity to invest. These giant funds currently in the market doing deals will have the advantage as the venture world shrinks with winners separated from the losers. Valuations to get into entrepreneurial deals are lower, quality teams are easier to assemble and even the IPO exit route shows signs of getting more traveled in 2010.
Sure, venture returns are depressed and fund raising is not much fun, hitting a five-year low in the U.S. with a 68 percent drop to $95.8 billion in 2009. But don't count venture out. It's a highly cyclical business, as I know all too well having endured the dotcom ups and downs when I was doing international editing for Red Herring. And, when venture is less crowded, that's when the investment returns are best.
Another interesting thing these funds have in common -- besides size -- is an outlook on India and China. NEA now has teams in both India and China, and Norwest has staffed up an Indian office and may open in China, Promod Haque told Silicon Dragon. He pointed out that India has strengths in software development and outsourcing of business processes, while China kicks in with hardware as well as semiconductor production and logistics. Over the past year, Norwest has funded three companies in India: the National Stock Exchange of India, mobile value-added service OnMobile and Shriram City Union Finance Limited. Norwest also inked a deal in China: mobile software startup Borqs Inc.
Spotted at the recent holiday party Norwest had in the Valley, Vinod Khosla also indicated that he's got at least one cleantech deal in India. I bet there will be more soon.
Not to be outdone, NEA's Dick Kramlich has spearheaded his firm's outreach in both India and China-and even moved to Shanghai for a few stints to show NEA's commitment to the region. He has two public listings of Chinese semiconductor companies to show for it too, plus more in the works. Next to make the move to China may be Scott Sandell, at least from what he recently told Silicon Dragon. Stay tuned.
Meanwhile, some well-known firms that have scurried to raise new funds and are still on the fund-raising trail have downsized their ambitious targets. Draper Fisher Jurvetson is one. While the firm now has two RMB funds, Tim Draper told me, the much-heralded shop has dropped its fund-raising goal to $400 million from $600 million.
Look for other funds to follow that lead as the big get bigger and suck up the also constricted limited partner dollars for lesser groups.
History shows just how cyclical the business is. When I was working at Red Herring during the dotcom bubble, super-size venture capital funds were the trend then too. Then came the meltdown and suddenly the 'in' thing to do was to downsize. Walden International was one of the pioneering leaders who took down the size of its fund, in this case from $1 billion-plus to a more right-sized fund of $600 million with its latest fund at $380 million.
Walden went on to score successive hits, and the industry too shored up for several more years until this latest meltdown in late 2008. Again, let's not count venture out just because of the poor returns of 2009. It's a new year, and a new beginning for those who tough it out.