Report: Venture Capital Drying Up in Early 2009

The lifeblood of start-ups is slowing to a trickle, according to a statement from the National Venture Capital Association (NVCA).

Like everything else, venture funding for prospective businesses is drying up in the doldrums of the global economic downturn. The NVCA said just 40 venture capital funds raised US $4.3 billion in the first quarter of 2009, the smallest number of funds raising money in a single quarter since the third quarter of 2003. Overall, though, the dollars committed to new firms reflected a slight increase over the previous quarter when $3.5 billion was raised.

"The first quarter fundraising data suggests two distinct dynamics currently taking place during the economic downturn," said Mark Heesen, president of the NVCA. "First, the majority of venture firms are not actively fundraising at this time because they have either recently raised a fund and are investing those dollars or are waiting until market conditions improve. Second, despite the recession, venture firms with solid track records continue to be able to secure sizable commitments from limited partners as there remains a great deal of promise for future returns from the venture capital asset class."

Market conditions nearly halted the formation of new venture capital funds in the first quarter of 2009, according to the NVCA. Just three new funds and 37 follow-on funds were raised in the first quarter, or a ratio of over 12-to-1 of follow-on to new funds, compared to 6-to-1 in the first quarter of 2008 (with a 'new' fund defined as the first such at a newly established firm).

The funding from venture capital firms has long been a measurement of the health of such important economic sectors as the software industry, and in recent years it has sparked to life such start-up success stories as Amazon, eBay, Google, and YouTube.

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