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Are VC firms cooling despite billion-dollar funds?

Crosspoint Venture Partners' decision to suspend plans for a $1 billion fund raises the question of whether the venture industry is showing signs of cooling off after several years of success.

When Crosspoint Venture Partners decided to raise a mega $1 billion fund in October, the Nasdaq was hovering around 4,000 and the moribund market for initial public offerings appeared to be recovering.

But nearly two months later, the Nasdaq has slipped to 2,600 and the IPO pipeline is dry.

In response, Crosspoint took the unusual step of indefinitely suspending its plans for the $1 billion fund--even though numerous investors were willing to commit funds, managing partner Seth Neiman said.

The decision comes at a time when a record number of venture firms are joining the billionaire club. Surprisingly, the bulk of the 17 firms that raised billion-dollar war chests this year did so after the steep slide in March.

Nonetheless, Crosspoint's move raises the question of whether the venture industry is showing signs of cooling off after several years of stunning success.

"Only time will tell if other VCs will follow suit," said Sasha Talebi, research director for VentureOne, an industry research company. "This depends on many factors, including how much cash they currently have on hand for investments, as well as their individual firm-level strategies on how to allocate their energies."

Slowdown not a given
Some venture capitalists, however, do not anticipate a slowdown on billion-dollar funds.

"I think it was a timing issue for Crosspoint and shouldn't affect any other venture group that has the capacity and interest in marketing a $1 billion fund," said Michael Cronin, managing partner for Weston Presidio Capital, which announced Wednesday that it closed a $1.3 billion fund. Closing a fund means that no more money will be raised and the fund will begin to make investments.

The decline has actually created a good environment in which to create a large fund, according to Ron Kase, a general partner with New Enterprise Associates. They closed a $2 billion fund earlier this year.

"I think it's a great time to raise this type of fund, because valuations for companies are down," Kase said.

Although Crosspoint's Neiman does not know if his firm's action will influence the managers of other funds, he noted that firms raising $1 billion are run by "thoughtful" people who are well aware of the challenges and opportunities in the current environment.

"Our decision to suspend the fund is very simple," Neiman said. "We determined the public markets, valuations for start-ups and other issues had deteriorated to where it was not a good time to do a large fund."

Pros and cons
When the markets are as uncertain as they are now, a large fund also has its own size working against it: there may not be enough investments that offer acceptable returns, Neiman added.

The benefits, however, include the fewer road trips to raise capital and the flexibility to invest in capital-intensive industries such as optical networks and semiconductors.

A venture firm raises money for its funds via wealthy individuals and organizations, with the hope of capturing a sizable profit once the companies it adds to its portfolio either launch an IPO or are acquired.

Billionaire club
These funds raised more than $1 billion so far this year.

Venture Firm Month closed Amount raised
  New Enterprise Assoc.     Sept.     $2 billion  
  TA Associates     July     $2 billion  
  Spectrum Equity Investors     May     $1.75 billion  
  Technology Crossover Ventures     April     $1.6 billion  
  Accel Partners     June     $1.6 billion  
  Menlo Ventures     July     $1.5 billion  
  Softbank Venture Capital     May     $1.5 billion  
  CMGI @Ventures     Jan.     $1.5 billion  
  Redpoint Ventures     Aug.     $1.25 billion  
  Patricof & Co. Ventures     Aug.     $1.1 billion  
  Baker Capital     June     $1.1 billion  
  Meritech Capital Partners     Nov.     $1.1 billion  
  Summit Partners     Jan.     $1 billion  
  Battery Ventures     June     $1 billion  
  Mayfield Fund     April     $1 billion  
  Benchmark Capital     Sept.     $1 billion  
  Oak Investment Partners     Sept.     $1 billion  
Source: VentureOne
But with the IPO market looking sluggish and tech mergers and acquisitions on the decline since March, the current outlook is not pretty.

During the go-go days of the tech-stock explosion, venture funds could count on companies launching an IPO within a year or two. Previously, the traditional time frame had been five to six years.

When Crosspoint began its fund-raising efforts, investors were told the firm had some concern about the current market environment but still believed it could produce respectable returns, Neiman said. That changed two months later as conditions worsened.

Crosspoint has a reputation of producing strong returns for investors, given its early investments in companies such as Ariba, which nearly quadrupled on its first day of trading last year, and Juniper Networks, which soared nearly 200 percent on its debut a year ago.

Choosy investors
Meanwhile, market conditions have also made investors more selective when it comes to which fund they'll seek out.

"Fund-raising is more challenging for the venture community now," said Alex Rosen, general partner with the Sprout Group, which closed a $1.6 billion fund last month. "Investors are interested in a fund's historical returns?There have been fantastic returns over the last few years, but that will not be sustained in the immediate future. As a result, limited partners will be more selective in which fund they'll choose."

Despite the market downturn and the difficulty companies face in either launching an IPO or selling their operations, the number of billion-dollar funds dramatically jumped this year, to more than 17 compared with five last year.

"Historically, there has been a buffer or lag between negative events in the public sector and their associated impacts on the VC space," Talebi said. "As such, a few investors figured the effects would wear off or only slightly cool the white-hot sectors that were raking in billions of VC dollars at the time. Others deemed it in their best interests to raise the money while they could--something of an entrepreneur mentality."