Venture capital fundraising appears to be on the rise with 52% of venture capital firms worldwide planning to raise another fund before the end of 2004, according to the findings of the VentureOne/Ernst & Young Outlook Study. The distribution of fundraising was evenly matched between the U.S. and Europe, with 53% and 48% of the respondents, respectively, indicating they would be raising another fund by 4Q’04.

While U.S. fundraising in the first three quarters of 2003 was at a significant low of $3.4 billion, signs in this quarter are already pointing to an upswing. New Enterprise Associates last week closed its NEA 11 fund at $1.1 billion, which is the largest fund raised this year to date. European venture capital fundraising has also lagged with EUR 803 million raised in the first three quarters. Meanwhile, the study noted that 10% of the respondents worldwide began concerted fundraising efforts in 2003.

While U.S. fundraising in the first three quarters of 2003 was at a significant low of $3.4 billion, signs in this quarter are already pointing to an upswing. New Enterprise Associates last week closed its NEA 11 fund at $1.1 billion, which is the largest fund raised this year to date. European venture capital fundraising has also lagged with EUR 803 million raised in the first three quarters. Meanwhile, the study noted that 10% of the respondents worldwide began concerted fundraising efforts in 2003.

John Gabbert, Vice President of Worldwide Research at VentureOne noted that as the pace of exiting has shown signs of improvement in recent quarters – with completed IPOs and increased S-1 filings – a jump in both fundraising and investing is not surprising. “Almost a tenth of the respondents are expecting an improved level of success for current portfolio companies, saying at least 40% of their existing investments are well positioned for an exit next year. By unloading the current crop, general partners will have the time to spend on fundraising and the appetite for early-stage investing in new companies,” said Gabbert. “LPs are ready to return to investing in this asset class as well. With little fundraising activity in the last few years, investors trimmed their allocations to private equity and venture capital. But they appear poised to invest again, although not at the level experienced in 1999-2000.”

Along with the predicted up tick in fundraising activity, the majority of venture capital firms also report they will be investing at a fairly robust pace, with 73% planning to invest in up to five seed or first round deals over the next year. An additional 21% are planning to invest in five to seven early stage deals. The study was compiled from 257 respondents to a survey sent to venture capital and private equity firms.

"The venture capital industry is finally getting back to the business of fueling innovation and building long-term, stand-alone companies," said Dave Furneaux, Managing General Partner, Kodiak Venture Partners. "Both the entrepreneur and VC expectations have become more realistic and we are entering a time of growth and great opportunity."

“VC activity in the most recent two quarters is showing signs of optimism after the downturn of the last three years.  The entrepreneurs we’re seeing today are leading higher quality companies that are more capital efficient, with technologies that are meeting market needs, making it reasonable to expect increased early stage investing globally.  The larger U.S. funds we’ve spoken with are each planning to invest in 10-15 new deals in 2004,” said Gil Forer, Global Venture Capital Advisory Group leader, Ernst & Young. “The coming year will also bring challenges:  the emergence of new global innovation centers such as China and India, the need for funds to efficiently prepare companies for an exit in the new regulatory environment, and the continuing consolidation of the VC industry.” 

The study found that investors would largely come from the existing pool. About 57% of the venture capital firms expect 50% to 100% of their current LPs to return. The size of the expected fundraising activity is on par with current levels. More than half, 55%, plan to raise a fund of $100 million or less.  Only 7% expected their new funds to exceed $350 million – specifically 7 U.S. firms and 9 European firms.

As with recent quarters’ financing patterns, healthcare, specifically biotechnology, is seen as the most promising investment sector in 2004 for a third of the respondents.  Separately, 34% of respondents said their firms will increase their investment level in healthcare/biotechnology/medical devices companies next year and 59% will invest the same as 2003. Information technology also remains popular: 60% of firms will maintain their current investment levels in IT, and 28% will increase the level of investment there.

"2004 should be a good year for venture capitalists", said David Ladd, Managing Director of Mayfield.  "The new deal flow remains strong exiting 2003, the entrepreneurial sprit is alive, and well in Silicon Valley.  The public markets are opening up, and the general business climate for technology products looks to be significantly better."

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Ernst & Young, a global leader in professional services, is committed to restoring the public’s trust in professional services firms and in the quality of financial reporting. Further information about Ernst & Young and its approach to a variety of business issues can be found at www.ey.com/us/perspectives.  For further information about the study contact:

Michelle Jeffers                                     Ciara O’Sullivan

VentureOne                                          Ernst & Young

(415) 538-2658                                      (212) 773-6153

corpcomm@ventureone.com                   Ciara.osullivan@ey.com