Morgenthaler Ventures (where I am currently an EIR) announced today that they closed their ninth fund. In a normal market, this would have been business as usual and not be particularly newsworthy. However the current financial markets are anything but normal.
According to the NVCA release, the number of venture funds closed over the last quarters is:
1Q'07 83 2Q'07 83 3Q'07 78 4Q'07 85 1Q'08 70 2Q'08 76 3Q'08 55
In 3Q of this year we saw a steep drop. However the impact of the current liquidity crisis and the resulting stock market decline didn’t become fully apparent until October. If I would have to bet, I would expect 4Q to look a lot worse. Venture Beat recently wrote about this and concluded that essentially what we are seeing, is a shakeout in the VC industry. While I haven’t seen numbers yet that conclusively demonstrate this, it intuitively makes sense. Firms that were burnt badly in the post-bubble of 2000-2003, now have fully invested their funds and realize that in the current financial climate they can’t raise additional capital. One would expect new entrants in the Venture Capital space to be the most vulnerable. A firm like Morgenthaler with almost 40 years of track record and an established network of LP’s is naturally in a much better position.
For those firms that do raise funds now, prospects are not bad. Less active firms means less competition and more attractive valuations. Public markets may stay closed for a while, but private companies have a lot of cash on their balance sheets that I would expect them to eventually use for acquisitions. In the end I do think venture backed companies are a more effective model for innovation than large companies doing it themselves. If this is correct, the value chain should continue to function and venture investors will make money.
In the mean time, congratulations to the Morgenthaler team for closing their ninth fund!