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The Aughts: Venture Capital’s Zombie Decade

We’ve come up with a list of 18 large venture firms with most recent funds of $100 million or larger that fall into zombie territory and highlighted five in the most recent issue of Forbes Magazine.

The five largest zombie funds: Prospect Ventures‘ $500 million 2005 fund; Sanderling Ventures‘ $421 million 2004 fund; Healthcare Ventures’ $378 million 2005 fund; Alloy Ventures‘ $368 million 2005 fund; and Kodiak Venture Partners‘ $316 million 2004 fund. (Kodiak Venture Partners responded in an email statement after publication that it raised a fund in 2007 from a single limited partner. The firm did not return follow up calls or emails about the size of the 2007 fund.)

How did we find the zombie funds? We looked at the National Venture Capital Association’s list of all venture firms and picked out any firm that hadn’t announced a new fund since 2005.  “Managers often go back to their investors in three to four years after they raise a fund,” says Peter Mooradian, who runs the venture research arm at Cambridge Associates, an investment advisory firm. “If not, it can be a red flag.”

From there, we called firms to find out whether they had raised a fund that had not been announced yet. Some firms like digital media investors Fuse Capital and Midwest investors Hopewell Ventures admit they won’t be fundraising in the short-term.  Others have declined to comment or say they’ll look at the market in a year or two. The Securities and Exchange Commission explicitly prohibits firms actively engaged in fundraising from admitting it.

Limited partners are saying show us the money,” says Peter Sinclair, a principal at Leapfrog Ventures, a Menlo Park, California firm that raised its second $200 million fund in 2005. “They want to see not just a portfolio that’s valued on paper but real money in their pockets. Since there are a limited number of exits, limited partners have been reticent to put money back in.” Sinclair says he and his partners plan to raise another fund in 2011.

In the “aughts,” as Sarbanes-Oxley made it more difficult for startups to file for initial public offerings, the venture industry’s contracting rapidly with the number of dollars invested in venture funds down by 20% to $179 billion in 2009 compared to 2000, according to the National Venture Capital Association. As of June 30 the VC industry had posted a -4.2% annualized return over the previous decade, versus a -1.6% for the S&P 500, according to the NVCA. Google’s 2004 IPO and the rapidly escalating values of Facebook and Groupon haven’t helped move the overall industry move into positive territory.

“We’re absolutely seeing a contraction in the venture industry, and it will continue,” says Mark Heesen, the President of the National Venture Capital Association. “Some firms will continue to be around but they will be much smaller.”

The lead investors at venture firms earn their keep by collecting management fees to the tune of 2% of the fund size. The big payout comes from any profit, which venture investors take a 20% cut and the limited partners keep the rest. These days, limited partners are looking for liquidity events that produce these  profits or “carry checks” before committing to investing more money.

Some of the zombies might rise again, and though Cambridge Associates’ Mooradian says the average fundraising period for most firms has doubled to about six months, firms like newcomer Valley superstar Andreesen Horowitz, with investments in web startups Foursquare, Digg and Zynga, raised a second $650 million fund, double its original fund, just fifteen months after raising its original fund.