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For mammoth venture capital fundraising, 2009 may become known as the era that tar pits came into season.
Atlas Venture and Bain Capital Ventures both stopped well below the tall fundraising goals they had set for their most recent funds. In an economic environment that has put behemoth funds far out of reach, it might sound like sour grapes, but some general partners are saying smaller is better, and calling for a return to venture capital’s roots — smaller, more focused funds.
Not so long ago, it was easy to stack up big dollars from limited partners. In August, Waltham-based Battery Ventures closed a $250 million supplement to its $750 million eighth fund, bringing the fund’s value to $1 billion.
In November, Atlas filed for a $500 million eighth fund. After three months of fundraising, the fund closed at $283 million — $100 million smaller than Atlas’ seventh fund. In December, Bain — the venture capital arm of the Boston-based private equity firm Bain Capital — filed for a $750 million fund. Earlier this month, Bain closed the fund at $450 million.
Having fewer dollars to invest may help Atlas succeed with its latest fund, said partner Jeff Fagnan. “Venture capital’s never been a business that anyone’s been able to prove you can scale,” he noted. Bain founding partner James Nahirny did not respond to requests for comment for this story.
A handful of new, smaller funds are touting their size as an advantage.
“If you look historically at when this industry produced its best returns, typically the best returns are when funds are between 100 and 200 million bucks,” said Maria Cirino, co-founder of .406 Ventures, which closed its first fund last March at $167 million.
For most firms, success means the opportunity to build larger funds. But more money sometimes means general partners start investing outside their expertise areas, and lose focused oversight of their investments, Cirino said.
A change in the economics for startups has created more small-investment opportunities, which small funds are well positioned to take advantage of, said Bill McCullen, partner at LaunchCapital. The Cambridge-based firm launched with a single limited partner last year. The exact fund size is undisclosed, but it is currently less than $50 million, the firm has reported.
The availability of open-source code, offshore talent and cheap hardware have lowered the bar for Internet and software companies, McCullen said.
“We see some businesses that all-in might only need $3 (million) to $5 million in capital to get to break-even,” he said. “Because we’re investing small amounts of money, we have the flexibility to invest in those types of businesses.”
The firm’s strategy is to invest in companies with projected returns three to five times the size of total investment, said Launch managing director Elon Boms. “If you’re making five-X returns on small sums of money, it’s pretty large gains,” he said.
Size may give upstarts an advantage over better-established competitors in early-stage investing, Fagnan said.
“It’s really hard, if not impossible, to do true early-stage investing with a billion-dollar fund,” he said.
Many large funds adopt a so-called “barbell strategy,” in which they focus a mix of early-stage seeding and late-stage capital infusions, like the balance of weight on a barbell. Fagnan said he is skeptical. Early-stage investors need to know how to build companies; while late-stage investing calls for a financial engineer, he said, adding that firms trying to do both usually end up focusing more on the big-money deals.
“I think you’re going to see a trend which is kind of going back to the fundamentals of smaller venture funds — fewer numbers of partners investing and really investing in true innovation,” Fagnan said.
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