Venture capital funds don't die- at least not until they themselves announce their death. They can be knocked down, they can be reminded that they haven't raised new money for years, that they don't have the wherewithal to fund new investments. But they cannot be declared dead.
Several funds are not carrying out new investments, but are continuing to manage their existing portfolios. These are funds in purgatory - waiting for their fate to be determined.
The MoneyTree report published two months ago showed that out of 44 funds in 2000, only 20 funds remained in 2010. Among those still around are several that will disappear over the next 1-2 years.
Local funds use all sorts of tricks to remain alive. One is especially creative. A local fund turned to its investors and suggested to them that it should raise a small amount of money, about $30-40 million, which would not be allocated to the new fund, but to the previous one, in order to carry out new investments. The fund even promised that it would preserve the current investors' stake, as opposed to that of the new investors - should there be any.
In the venture capital model there is the option to raise funds for extending a fund - an annex fund - but this is done because there is a jewel or two in the portfolio which is worth waiting for. In addition, an annex fund will always be raised from existing investors, who have already been paying management fees for almost a decade, who have stood by their commitment, and who paid the money when it was needed. So why should they agree to the new idea? They won't.
Investment banks' zeal to deal
In the meantime, the wave of investment banks sending representatives here, or which are hiring a local representative who receives a percentage of any deals it puts together, continues to hit the shores of Herzliya. Among the investment banks are Mooreland and America Growth Capital, and CEOs of start-up companies report energetic courtship from those banks.
What are those representatives seeking? Companies that are near to an exit - it doesn't matter what type.
2010 was a slow year for exits. According to Israel Venture Capital Research Center (IVC), venture-backed companies had exits of $1.25 billion, down 19% from 2009, when the figure was $1.54 billion.
Everyone is hoping that there will be more exits here, and that includes the investment banks. If you wonder how an investment bank woos a start-up - it's simple. First, the investment bank makes an impressive presentation about its wide network of contacts from which it can bring a potential buyer; then comes the practical phase of getting the CEO to sign a representation agreement; and it appears that here is the Achilles' heal of the investment banks - they are so determined, that they offer reduced fees to the companies.
In these lean times, larger investment banks, such as Goldman Sachs, are getting involved in smaller deals than they used to do. This influences the smaller - boutique - investment banks which used to do the small and mid-sized deals. Now those smaller banks are looking for the tiny deals in order to do business.
Published by Globes [online], Israel business news - www.globes-online.com - on March 17, 2011
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