A VC Rebound

Limited partners upped the amount they threw to venture capital firms. But established firms remain the destination of choice for that investment.

Image: iStockphoto

The venture capital world, which in the past few years has had to get used to a less rich diet, looks to be ready to gorge itself on cash again.

Dow Jones LP Source reports this morning that $7.7 billion flowed to U.S. VCs in the first quarter of 2011, a huge jump from 2010’s $3.9 billion and the biggest first-quarter haul for VCs since the beginning of 2001. Venture capitalists generally raise their money from wealthy individuals, pension funds, and other big-money types who can afford to play in the high-risk, high-reward world of funding startups.

But since the collapse of 2007-2008, those limited partners have pulled back on putting new money into all but the largest and most stable venture capital firms, and the industry has shrunk.

That still appears to be the case, as Sand Hill Road’s big venture shops sucked up large amounts from limited partners, the report shows.

"The first quarter’s fundraising numbers show that established firms without major blemishes can still raise large funds while others face a tough sell,” said Scott Austin, editor of Dow Jones VentureWire, in a release. “With some of the larger U.S. venture funds closed and the industry with more than half the 2010 fundraising total already in its pocket, the next couple of quarters will tell us if limited partners hit their spending limit for venture funds or will continue to commit capital to the asset class.”

The amount of money that flows to venture funds, and the kind of venture funds that receive it, can play a big role in emerging businesses, since many of the hottest new businesses rely on venture capitalists to grow their operations.

Virtually every venture capitalist over the past few years has said he or she expects the VC business to shrink, with players that don’t have either a high-profile track record or a very defined area of investing to lose their appeal to limited partners. Still, the growth in investment this quarter, if it can be sustained, is good news for entrepreneurs in such emerging areas as social media, local coupon sites, and smart-grid technology.

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