Andre J. Peschong

(the naked underbelly of funding deals) By all accounts 2007 was a record year for raising capital, not only for venture funds but also private equity funds.  VC’s raised just shy of $35 billion in 2007, just missing the high mark of $38 billion in 2001.  Interestingly enough, in 2001 the economy and the market had hit their peak and were on the decline. Fast forward to 2008 and it sounds like a very similar economic and market scenario.  US private equity funds raised an eye popping $302 billion in 2007 which was a 19% gain from last year.  What does this mean?  Well, if you’re a company looking for capital in a hot industry sector like CleanTech, enterprise software, Web 2.0, it means you have many options at the feeding trough. In other words, you will get a much better valuation.  While this is positive for companies seeking funding, it does have a slight downside for funds. When VC’s or private equity firms raise capital for their own funds, it is imperative that the capital is deployed relatively quickly out of these funds into deals (companies seeking funding.) Why? Because idle capital drags down returns, shows the limited partners (investors) that you are not seeing quality deal flow and worst of all (to the horror of general partners) it means an exiting of their management fees and their carried interest.   Going back to the simple law of supply and demand, when funds are looking to deploy capital these days, there is simply too much supply (uninvested capital) and not enough demand (quality companies.)  When fund managers start to see increased competition for quality deals, they also start to see their margins get squeezed (better worded: the equity upside upon a liquidity event.)  The trickle down effect is felt, ultimately, by the LP’s.  If I was a limited partner in one of these newly minted VC or private equity funds, I would start looking very closely at the quality of the deals announced and see what type of valuation the managers are giving these deals.  Due diligence is key because in the next 18 months I predict there will be a number of private equity and VC firms that will announce the return of capital to limited partners because there is just too much capital chasing too few quality deals.   

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