There’s a fascinating article in the NY Times today on a
massive spike in funds raised by venture capital firms – a 78% increase in the
3rd quarter over the second quarter results. Folks in the VC game
see this as bad news, as the industry in over-funded and they literally need to compete for good deals to fund.
I’ve met with many VCs in Silicon Valley and the general position a year ago
was that there was 10 times more VC funding available than there were good
deals to fund – and that was well before huge ramp-ups of the past few quarters,
which have probably pushed this multiple near 20X… VCs literally can’t invest
their pledged funds fast enough, and that is a problem for them. It is safe to
say any good entrepreneurial venture is now very fundable and in fact in a
position to shop for best VC deals around the country.

Entrepreneurs generally view this as good news, as the more
money in play the better. From an ED perspective, the picture is less clear as
the more outside investors pursuing deals around the country and world the more
likely opportune ventures will go into national play, and ultimately relocate
to follow their money. The ED leadership challenge is to identify and nurture
high potential deals early and well – enrich and entrench them at home, before
they are lured elsewhere. The VC money market is highly imperfect and
inefficient, as funders don’t necessarily have good visibility as to what are
the best start-ups around the country, but the marketplace is becoming more effective
and fund managers will become increasingly aggressive, resourceful and
sophisticated as they must invest the funds they have committed – expect more
VCs to come shopping in entrepreneurial backwaters and expect more
entrepreneurs to be lured to centers of new economy development, where most of
the money is managed (and start-up companies are expected to be operated near their
investors, for tighter collaboration, oversight and management).

For conventional investors, the greatest risk of this loose
money is a bubble, like in the late 1990s, when bad deals were funded and
pushed into the IPO arena to churn VC funds and enrich early stage investors.
Fascinating dynamic… article below:

Venture Firms Say Billions Were Raised in 3rd Quarter

By GARY RIVLIN

Published: November 2, 2004

SAN FRANCISCO, Nov. 1 - Venture capital firms raised $5.54
billion in the third quarter, a 78 percent spike in fund-raising over the
second quarter.

That huge increase is already stirring worries that venture
capitalists will soon be rushing to finance start-ups with dubious business
prospects simply because the money is there.

The data, released on Monday by the National Venture Capital
Association and Thomson Venture Economics, drew a mixed reaction from the
association's president, Mark G. Heesen.

While Mr. Heesen praised venture investing as consistently
providing strong returns, he warned venture capitalists to avoid the temptation
of raising ever-larger funds in the coming months.

"If the industry begins to take more money than can be
invested successfully, performance will suffer," Mr. Heesen said. Steven
Dow, a venture capitalist with Sevin Rosen in Palo Alto, Calif., was not so
circumspect.

"I think it's horrible news," Mr. Dow said of the
increase in dollars raised. "I think it's going to be very hard for the
industry as a whole to make good returns when the committed capital in a given
year exceeds $10 billion to $12 billion. And we're on a pace roughly double
that."

Mr. Dow's own firm raised a new $300 million fund in July.

"I think at the macro level it's obvious to everyone
that there's too much money in this asset class," Mr. Dow said. "But
at the micro level of course every firm thinks it's different."

The growth in venture fund-raising came as no surprise to
Catherine A. Crockett, a managing director at Grove Street Advisors, a firm in
Wellesley, Mass., that invests in venture capital funds on behalf of wealthy
clients.

"Fund-raising in venture has been way off for the last
several years, which is a good thing," Ms. Crockett said. "So
everyone was expecting that there was going to be some uptick taking place
around now."

"I think if we continue to see these high numbers, that
would be a trend that concerned me," she added.

Steven P. Bird, a partner at Focus Ventures in Palo Alto,
also expected a bump in venture fund-raising given that the venture industry
raised only $3.66 billion in 2002, according to Thomson Venture Economics and
the National Venture Capital Association, and $10.53 billion in 2003. That
follows $38.06 billion raised in 2001, and $106.03 billion raised in 2000 -
sums so large that venture firms collectively still have tens of billions of
extra cash on hand.

"The industry was investing a lot more than it had been
raising for two and a half years," Mr. Bird said.

Now the opposite is starting to happen. The news dominating
the venture industry last week was a pair of reports showing that investments
in start-ups had fallen sharply in the third quarter.

Thomson Venture Economics and the venture capitalists'
association, along with PricewaterhouseCoopers, reported that venture
capitalists invested $4.3 billion in the third quarter, which means the
industry raised $1.2 billion more than it spent in the quarter.

"We shouldn't get too carried away based on one
quarter's numbers," Mr. Bird said. "But if you call back in a few
quarters and tell me fund-raising's up another 78 percent, then we'll have a
real problem."