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The Venture Capital World Keeps Getting Smaller

May 2nd, 2013 ::

By Maria Valdez Haubrich

Are you seeking venture capital to grow your small business? Then you’ll find a little good news, but mostly bad news, in the continued consolidation of U.S. venture capital firms. Venture capital firms raised $4.1 billion from 35 funds in the first quarter of 2013, according to the latest report from Thomson Reuters and the National Venture Capital Association (NVCA).

The good news: That’s an increase of 22 percent compared to the level of dollar commitments raised during the fourth quarter of 2012. The bad news? It’s a 14 percent decrease in terms of the number of funds.

Measured in terms of the number of funds, the first quarter of 2013 was the slowest quarter for venture capital fundraising since the third quarter of 2003. In addition, the majority of the total fundraising (57 percent) came from the top five venture capital funds, three of which are based in Massachusetts (Battery Ventures X, Third Rock Ventures III and Spark Capital IV).

“The first quarter venture fundraising activity really demonstrates the contracting and consolidating nature” of venture capital today, John Taylor, head of research for NVCA, said in announcing the report’s results. “The lack of a strong exit market is keeping many funds that would like to be raising money away from investors until they can demonstrate a track record. This dynamic is keeping the number of funds raised low.”

The trend is going to continue, Taylor says, warning entrepreneurs they should be prepared for fewer funds in 2013, and noting that this will ultimately decrease investment levels from traditional firms.

The NVCA reports that there were 30 follow-on funds and five new funds raised during the first quarter of 2013, for a 6-to-1 ratio of follow-on to new funds. (A “new” fund is defined as the first fund at a newly established venture capital firm.) Based on dollars raised, follow-on funds account for 98 percent of total dollar commitments made during the first quarter of 2013. This continues a trend that’s been going on during the past five years, in which time follow-on fund dollars have accounted for a whopping 92 percent of total venture capital fundraising.

Image by Flickr user tuppus (Creative Commons)

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