Take my money, please!
That's the refrain of major institutions and rich individuals these days, as they try to elbow their way into top venture funds.
"Last summer, we wanted to raise a $450 million fund," recalls Jim Breyer of Accel Partners, a Palo Alto, Calif., venture firm. "Within two weeks, just talking to our existing investors, we had commitments for $2 billion." Unwilling to manage so much money at once, Mr. Breyer and his colleagues spent more time shrinking those offers to bearable amounts than they did raising money in the first place.
Some people simply wouldn't take "no" for an answer. "A number of European billionaires have discovered venture capital and want to be in funds like ours," Mr. Breyer says. "Some of them would call every day, for weeks, asking to get in. They let us know they were extremely disappointed we couldn't take them."
Other aspiring investors try to charm their way in. When Redpoint Ventures of Menlo Park, Calif., was raising $700 million last year, its partners one day were surprised to get a giant picnic basket at noon one day, with prepackaged gourmet lunches from a hopeful institutional investor. "They're nice people, but there just wasn't room for them in the fund," says Jeff Brody, a Redpoint partner. "We're still saying no to them."
Breathing easiest amid this funding frenzy are longtime venture-capital investors such as the endowments of Ivy League schools, Stanford University and the Ford Foundation. Because those investors helped many of today's renowned venture firms get started many years ago, they needn't scramble for a spot each time venture capitalists decide to raise more money.
But newer investors keep pressing to make sure they are in the club. That is especially true at Benchmark Capital Partners of Menlo Park, which has scored enormous investment gains from backing eBay Inc. and other Internet highfliers. When Benchmark raised a $1 billion fund last year, it took in only three institutional backers that hadn't previously invested with the fund, even though it got more than 100 offers of outsiders' money.
Among the new arrivals was the University of North Carolina's endowment. Eager to build a closer relationship with Benchmark, UNC officials in Chapel Hill need for arranged for the venture firm's partners to visit some promising North Carolina companies this winter -- and threw in six front row tickets to the UNC-Duke basketball game. Nice try, but things got so busy for Benchmark at its California headquarters that the whole trip was canceled.
Meanwhile, wealthy individuals are just as eager to get a piece of venture-capital action. Traditionally, venture firms have raised about 10% of their capital from individuals, such as chief executives of previous portfolio companies. With the huge buildup of wealth in Silicon Valley and other high-tech centers, though, swarms of rich people are asking to put $10 million or more apiece into venture funds.
Only a lucky few are invited in. "We want to work with people who can really add value to our portfolio," Redpoint's Mr. Brody says. That means well-connected high-tech moguls who can help Redpoint find new deals and recruit executives to the companies it does invest in. "If you went to business school with me and made a lot of money in real estate, that isn't enough anymore," Mr. Brody says. "We're quite explicit about that."
Aware that they have the upper hand in fund-raising, some elite venture firms are putting tougher terms in front of outside investors. Years ago, almost all venture firms kept 20% of investment profits for themselves and let outside investors enjoy the rest. Now, though, many firms keep 25% or even 30% of profits. Yet the profit pool has been so rich lately -- many VC funds post triple-digit percentage gains, after fees -- that few institutions have grumbled, let alone walked away.
Foundation Capital, for example, raised $275 million at the end of last year, far more than its previous two funds. "The new one took us just three weeks, and we didn't have to get on a single airplane," says William Elmore, a Foundation partner. "All the investors came to us. The first time we needed to raise money, it took us three months and a lot of travel."
Two new fund-raising initiatives in this year's first half are likely to push the investor stampede to even greater heights. Accel plans to raise a $1 billion or larger fund. Kleiner, Perkins, Caufield&Byers, the Menlo Park firm that bankrolled Amazon.com Inc., among others, is preparing a new round of fund-raising, according to several of Kleiner's current investors. Kleiner officials didn't return calls seeking comment.
While financiers are enjoying the current boom, most wonder how much longer it will last. "Anyone who thinks that triple-digit annual returns are sustainable is delusional," Accel's Mr. Breyer says. "If we can do 20% to 25% a year after fees, in tougher times, we'll be doing our job. We're looking for investors who really understand that."