The venture capital seesaw

Can Silicon Valley start-ups look forward to more VC money, or less? We’re getting mixed signals. The latest news today is good, at least. Investors poured $5.5 billion into venture capital firms during the third quarter, a significant $78.4 percent increase over the second quarter, according to a survey by Venture Economics and the National Venture Capital Association.

Contrary to widespread dire predictions made in 2000 that the venture industry was due for a massive consolidation, it seems we’re seeing more venture firms emerging, not fewer.

One of the more recent is Emergence Capital, based in Burlingame, which aims to focus on software-as-service start-ups like Salesforce.com and RightNow with a $125 million fund. They say they orginally aimed for $100 million, but venture firms are getting showered with money offers everywhere they turn.

These commitments, mostly made by large institutions such as universities and pension funds, mean that venture firms will have more money to invest in Silicon Valley-style start-ups. This encouraging data, though, follows a separate survey last week (see our story) that showed venture capital firms actually slowing their pace of investments into start-ups during the third quarter.

“We are now seeing an extremely strong level of interest in the venture capital asset class from institutional investors and rightly so. Venture capital produces above average returns over the long term,” said Mark Heesen, president of the NVCA, the industry’s lobby group, in a statement.

However, Heesen cautioned venture capital firms to stay disciplined in their fund-raising and investment pace. “”If the industry begins to take more money than can be invested successfully, performance will suffer.”

Venture funds that focus on investing in seed-stage or early-stage start-ups accounted for 42 percent of venture capital fundraising dollars for the
quarter, with twenty-eight funds raising $2.3 billion. Among these were the $600
million fund raised by Menlo Park’s InterWest Partners and the $375 million fund raised by Benchmark Europe.

At Emergence, one of the partners, Jason Green, hails from Menlo Park’s U.S. Venture Partners. Another is Gordon Ritter, who before Emergence started a company with Marc Benioff, which was merged into Salesforce.com.