funding resource

Capital OverhangReport

PitchBook

Fundraising and1H 2013 Venture Capital

Sponsored by:

www.pitchbook.com | [email protected] | 877.267.559311H 2013 PE Fundraising and Capital Overhang Report

Bet ter Data. Bet ter Decisions.PitchBook

www.edisonventures.com | @edisonventures

Introduction

COPYRIGHT © 2013 by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means – graphic,

electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems – without the express written

permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be

guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an off er to sell, or a solicitation

of an off er to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to

be relied upon as such or used in substitution for the exercise of independent judgment.

Venture capital (VC) deals steal most of the media attention, but in VC circles much of the recent discussion about the industry has centered on the topic of fundraising. Everyone knows that capital is the lifeblood of startups, but it also plays a similarly crucial role for VC funds. Unlike their counterparts on the private equity side, VCs do not typically take out large amounts of debt to fund their deals, so virtually every dollar of capital invested in their portfolio companies comes straight from their fund. To that end, having a reserve of capital to deploy is essential. Th is is why many people are worried that for the fourth consecutive year VC fi rms have invested more capital than they have raised.

Looking at the VC capital overhang, there is $63.5 billion of dry powder currently available to VC fi rms. Considering that VC investment has averaged $26.6 billion annually over the last four years, that means VC fi rms currently have less than 2.5 years’ worth of capital on hand.

Another major concern has been the burgeoning size of VC funds, as the average fund size nearly doubled from 2009 to 2011. Larger fund sizes may seem like a positive trend on the surface, but it is actually a result of a massive consolidation of capital with a few of the premier managers of the last decade. Furthermore, larger funds have a necessity to write larger checks, which could lead to a shortage of capital for early stage investments. However, the average fund size had a meaningful 37% drop in 2012 as VC fi rms had more success raising funds of less than $100 million. Additionally, there were 14 fi rst-time funds raised in 2012—more than double the number from 2011.

Th is report examines current U.S. fundraising trends from several angles to provide a holistic picture of the current fundraising environment. We hope the charts, graphs, and analysis provide you with better data for better decisions.

***Editor’s Note: All fundraising totals and the capital overhang exclude corporate VC allotments and angel investments made through private accounts. However, capital from these types of investors are included in all of PitchBook’s VC investment totals. Th is explains why the capital overhang increased in 2012 despite there being more capital invested than there was raised.

Edison Ventures was founded in 1986. We partner with entrepreneurs to help them build successful, high growth companies. Edison provides capital and value-added services to growth stage ($5 to 20 million revenue), technology businesses. Investments range from $5 to 10 million initially while reserving up to $10 million for additional growth fi nancing. Edison is typically the fi rst institutional and lead investor. In addition to providing expansion capital, Edison funds management buyouts, recapitalizations, spinouts and secondary stock purchases.

Edison’s HQ is in Lawrenceville, NJ. Our investment professionals are based in New York, NY, McLean, VA, Needham, MA, and Cleveland, OH. Industry specialties include fi nancial technology, healthcare IT, enterprise 2.0, interactive marketing and ecommerce. Edison has made more than 160 investments and realized over 110 successful exits generating substantial proceeds for founders, management, employees and investors.

Edison Ventures manages over $800 million. For more information please visit www.edisonventures.com and follow us on Twitter @edisonventure.




$5.1 $1.3 $4.0 $2.6 $8.7 $1.9 $3.0 $3.7 $5.5 $5.3 $2.9 $6.0 $7.4 $4.0 $7.0 $1.8

35

11

22

9

30

16

2118

1512 14

15

2623

30

11

0

5

10

15

20

25

30

35

40

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

2009 2010 2011 2012

Capital Raised ($B) # of Funds Closed Source: PitchBook

Source: PitchBook

VCs close 90 funds, most since 2008Fundraising by Quarter

In one of the more interesting VC statistics from the year, the number of VC funds closed in 2012 skyrocketed 61% from 2011 while the amount of capital raised only ticked up 3%. Th e phenomenon stemmed from a strong increase in the number of small funds, as the number of vehicles with less than $50 million nearly tripled from 2011 to 2012. Another positive trend in 2012 was the return of fi rst-time funds, which more than doubled from 2011 to 2012. Still, there were only 14 fi rst-time funds in 2012, which is the second lowest total in the last decade.

Fundraising in the VC industry can be quite sporadic from quarter to quarter, but 4Q 2012 stands out as being particularly weak, with just 11 funds closing on a total of $1.8 billion—some of the lowest totals in the last four years. However, 2012 did post two of the best quarters for fundraising in recent

memory as VC fi rms raised more than $7 billion in both 1Q and 3Q.

Looking ahead into 2013, fundraising should continue to accelerate since there are more than 250 investors currently

seeking capital for nearly 300 vehicles. Small funds should continue to see success in 2013 as well, as the average target size for currently open VC funds is just $141 million.

Capital raised increases for the fourth consecutive yearFundraising by Year

$17.6 $30.3 $31.3 $40.7 $30.7 $12.9 $17.2 $19.6 $20.2

153

181

158 157 147

77

85

56

90

020406080100120140160180200

$0$5

$10$15$20$25$30$35$40$45

2004 2005 2006 2007 2008 2009 2010 2011 2012

Capital Raised ($B) # of Funds Closed




As the accompanying charts show, there was a drastic swing in the size of VC funds raised from 2011 to 2012. VC investors closed just 17 funds of less than $100 million in 2011, which is less than half the next lowest total from the last decade. Many investors expressed concern throughout the year about the dearth of smaller funds and the potential ramifi cations it could have for companies seeking early stage fi nancings. Perhaps some of these fears will be abated thanks to a strong resurgence of these vehicles in 2012, as funds of less than $100 million expanded from 31% of all VC funds in 2011 to 49% in 2012.

Another positive trend stemming from the increase in smaller funds is a growing number of new VC fi rms; 10 of the 35 funds that closed with less than $50 million in 2012 were from fi rms raising their fi rst fund. It is important to note that while the number of fi rst-time funds more than

doubled to 14 in 2012, there were regularly more than 40 fi rst-time VC funds raised annually throughout the early to mid-2000s. Th e future looks bright though, as there are more than 100 VC fi rms currently raising capital for their fi rst vehicle.

VC fi rms enjoyed more success raising capital for funds of virtually all sizes in 2012, with the $1 billion and over size range being the only size bucket to see fewer funds closed in 2012 than 2011. Th e downtick in

Source: PitchBook

Source: PitchBook

VCs refocus their attention on smaller funds in 2012

Funds with less than $100M increase to 49%

of all funds in 2012

Capital Raised by Fund Size

Fund Count by Fund Size

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012

$1B+

$500M-$1B

$250M-$500M

$100M-$250M

$50M-$100M

Under $50M

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012

$1B+

$500M-$1B

$250M-$500M

$100M-$250M

$50M-$100M

Under $50M

mega funds of $1 billion or more may not necessarily be a bad thing, as some VC professionals had expressed concern about the amount of capital being concentrated in a relatively small number of funds.

Larger funds inevitably lead to larger

checks that blur the line between VC and private equity growth investing. In addition, with the limited amount of capital currently available to VCs, having a large proportion allocated to just a few funds could limit funding for startups and early stage ventures.




Average fund size drops 37%

LPs make larger commitments to VC funds in 2012

Source: PitchBook

Th e average VC fund size escalated quickly following the fi nancial crisis, nearly doubling from $180 million in 2009 to $357 million in 2011. Whether it was a conscious reaction or not, VC fi rms swift ly worked to reverse the trend, as the average fund size fell 37% to $225 million in 2012. As the chart above reveals, much of the run-up in fund sizes was due to a lack of small funds, as opposed to a surge in large vehicles.

It appears that the decline in fund sizes will continue into 2013, as the average target size of currently open funds is just $141 million. Furthermore, more than half of the currently open funds are seeking $100 million or less.

Interestingly, while the average fund size dropped substantially in 2012, the average institutional LP commitment size rose to $28 million—the second

3 12 17 21 19 8 10 15 13

$119

$172$207

$275

$221

$180$207

$357

$225

0

5

10

15

20

25

$0

$50

$100

$150

$200

$250

$300

$350

$400

2004 2005 2006 2007 2008 2009 2010 2011 2012

No. of Funds Larger Than $500M Average Fund Size ($M)

highest total from the last decade. Th is may be a refl ection of the growing scrutiny of the asset class; many LPs have expressed doubts about VC investing aft er more than a decade of subpar returns and have begun to

reevaluate their current relationships. As LPs begin to pare down their

number of VC investments, it should force investors to write bigger checks in order to keep their allocation to the asset class stable.

Average Fund Size & No. of Large Funds

$14 $14 $21 $17 $17 $30 $19 $18 $28$0

$5

$10

$15

$20

$25

$30

$35

2004 2005 2006 2007 2008 2009 2010 2011 2012

Average LP Commitment ($M) to VC Funds

Source: PitchBook




VCs have less than 3 years of capital

$7.73

$10.23

$3.87

$8.29

$15.15

$18.26

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

2007 2008 2009 2010 2011 2012

Cumula

ve Overhang ($B)

Curr

ent O

verh

ang

($B)

by

Vint

age

Under $50M $50M-$100M $100M-$250M $250M-$500M $500M-$1B $1B+

Cumula ve Overhang

Overhang by Vintageand Fund Size

VC Capital Overhang

Source: PitchBook

Cumulative OverhangAs of year Amount ($B)

2006200720082009201020112012

$73.5$85.4$85.3$81.9$69.6$61.3$63.5

As the capital overhang does not included corporate VC allotments and investments made through private accounts, the capital overhang actually increased slightly in 2012 despite there being more capital invested than there was raised. Still, the capital overhang has dropped a meaningful 22% since 2009, and the $63.5 billion currently available to VC fi rms represents less than 2.5 years’ worth of capital if investors continue investing at their current rate.

Interestingly, VC fi rms still hold nearly $18 billion of capital in 2007 and 2008 vintage funds. Of course, it is important to consider that there was a total of $71.5 billion raised in 2007 and 2008, so it will naturally take a bit longer for managers to allocate all of their capital. As these funds begin to eclipse the fi ve-year mark, capital will need to be put to work

imminently. Otherwise, VC fi rms risk missing their investment window and may have to return money to investors. Th is should be a positive for the industry in light of the weak fundraising in recent years.

Another important feature of the overhang is the dearth of capital available in 2009 and 2010 vintage funds; although, this should be somewhat expected with the anemic fundraising numbers posted in those years. Th e lack of available capital in these vintages could dampen investing in the next couple of years. Fortunately, there is the aforementioned stash of capital in earlier vintages, but VCs still may have to draw down more recent vintage funds more quickly than they normally would.

It is also worth noting that 55% of the currently available capital is

concentrated in funds of more than $500 million. Th at bodes well for companies seeking large late stage rounds, but as we have discussed throughout this report, it could pose a challenge for startups and early stage ventures.

Source: PitchBook




VCs invest more than they raise for the 4th straight year

Firm

Technology Crossover VenturesChesapeake EnergyMithril Capital ManagementVantagePoint Capital PartnersKleiner Perkins Caufi eld & ByersRaine PartnersSequoia CapitalSocial + Capital PartnershipKPCB XII Annex FundJAFCO Technology Partners VProteus Venture Partners Fund INewPath VenturesAvalon VenturesAzure Capital PartnersUnion Square VenturesCardinal Venture Capital

Fund

Technology Crossover Ventures VIIIChesapeake NG Ventures Fund

Mithril Growth FundVantagePoint CleanTech Fund III

KPCB Green Growth Fund IIRaine Partners I

Sequoia Capital US Venture FundSocial Capital Partnership

Kleiner Perkins Caufi eld & ByersJAFCO Ventures

Proteus Venture PartnersNew Path Ventures II

Avalon Ventures XAzure Capital Partners III

Union Square Ventures 2012 FundCardinal Venture Partners II

Fund Target Size ($M)

$2,500 $1,000 $1,000$1,000

$764 $500$450 $450$360$300 $300$300 $250 $250 $200$160

Fund Type

General VCGeneral VCGeneral VCGeneral VCGeneral VCGeneral VCGeneral VCGeneral VCGeneral VCGeneral VCGeneral VC

Early Stage VCEarly Stage VCEarly Stage VCEarly Stage VCEarly Stage VC

Select currently open funds

$14.3$8.7

$14.7

$1.4

-$7.4 -$6.7

-$14.8

-$7.6

$(20)

$(10)

$-

$10

$20

$30

$40

$50

2005 2006 2007 2008 2009 2010 2011 2012

Net VC Capital ($B) Capital Invested ($B) Capital Raised ($B)

VC Capital Invested v. Capital Raised

Source: PitchBook

Source: PitchBook

One of the best ways to put VC fundraising into context is through juxtaposition with investment numbers. As we have mentioned throughout this report, VC investment has outstripped fundraising for four consecutive years. Much of this trend is the result of an uptick in investment from corporate VC arms and angel investors, which are not included in the fundraising numbers, as well as a signifi cant reduction in the capital overhang.

In 2012, there was $7.6 billion more VC capital invested than was raised through VC funds. While this is an improvement from 2011, the trend can’t last much longer, as many LPs are reducing or eliminating their allocation to the VC asset class. Th ese developments have led some people to wonder if there needs to be a systemic change in how the VC industry operates.

Due to the aforementioned factors,

the amount of dry powder available to VC fi rms has dwindled from $85.3 billion in 2008 to $63.5 billion in 2012. If VC fi rms continue to invest at their current rate, there would be about

2.3 years’ worth of capital available to invest. Considering this, VC fi rms will either have to curtail their investing or fi nd new ways to attract capital to the asset class in the coming years.

PitchBook tracks more Private Equity and Venture Capital data than anyone.

* All

Pitc

hBoo

k da

ta s

ourc

ed fr

om th

e Pi

tchB

ook

Plat

form

as

of 1

/22/

2012

Want the whole pie?

Bet ter Data. Bet ter Decisions.PitchBook Private Deal Comps

Targeted Business Development

Sourcing New Deals

Targeted Buyers Lists

Benchmarking Funds & IRR

Public Company Fundamentals

94,173 24,826

17,285

58,500

6,641 8,781

Limited Partners

Investors

Funds

Companies

Deals

Service Providers

PitchBook Corporate Headquarters1201 Alaskan Way, Pier 56 - Suite 200Seattle, WA 98101

1-877-636-3496

www.pitchbook.com

[email protected]

funding resource

Economy & Finance