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Two more venture capital firms — Wellesley-based Venture Capital Fund of New England (VCFNE) and Lynnfield-based Velocity Equity Partners — have suspended efforts to raise new funds, following Prism Ventureworks into the VC fundraising doldrums.
Unlike Prism, which last month said it still had funds remaining for three to five new investments but would not seek to raise a sixth fund, Velocity and VCFNE said they would no longer be investing in new companies out of their current venture funds.
Both Velocity and VCFNE said they will continue to defend portfolio companies by reinvesting in them with reserve capital. Once the last startup leaves the nest, the last remaining partner may have to turn out the lights. But Gordon Penman said he and the other partners at the long-standing VCFNE are hopeful that won’t be the case. “We’ve had some success in the portfolio and the best is yet to come from the existing portfolio,” said Penman, who is also an attorney at Brown Rudnick LLP. “Once the current environment changes, we’re hopeful that we’ll have the track record to raise another fund.” Their fourth fund, worth $25 million, closed in April 2002, Penman said.
Both Velocity and VCFNE had participated in the federal Small Business Investment Companies (SBIC) program, which co-invests government money with certified venture capital funds.
New venture
Founded in the early 1980s, VCFNE brought on a new managing director in 2005 and intended to raise a fifth fund without SBIC participation. Rashid Ashraf, who had been a founding partner at Blue Sky Ventures in Framingham, had planned to take the VCFNE mantle from veterans Harry Healer Jr. and Kevin Dougherty. Instead, Ashraf has left VCFNE to take a founding partner role at a new firm, Arrowpoint Ventures, with former Kodiak Venture Partners partner John Abraham and former Castile Ventures partner Marcia Hooper.
Healer and Dougherty plan to help guide the firm’s fourth-fund investments to liquidity, and are expected to retire after that, both Penman and Ashraf said.
VCFNE failed to raise funds because of bad timing and because the firm was trying out a new model, said Ashraf. By attempting to raise a much larger fund — over $100 million — without SBIC assistance, he said, VCFNE represented an uncertain proposition to limited partners, or LPs, those who provide the capital that VC firms invest in startups.
Ashraf’s new firm, Arrowpoint, is in a holding pattern as its founders wait for the right moment to raise a $150 million fund, which is expected to be targeted toward early-stage investments in infotech, medical device and wireless companies. Potential LP investors, such as pension funds or endowments, are already over-allocated in VC and private equity, Ashraf said. That makes it better for a nascent fund to wait.
“Even though all three of us have been VCs, when it’s a new team, you’re considered to be an emerging manager,” he said. “To go out and not be able to raise (a first fund), I don’t think sends a very good message to the market.”
A failed fund-raise can tarnish even an established firm, said Bill Asher, a VC finance attorney with the Boston law firm Choate Hall & Stewart LLP. “The real issue is whether your existing limiteds are going to support you on the next fund,” Asher said. “If that’s not happening then you’re in real trouble.”
But perception is not absolute, he added. If the economy improves, limited partners will be looking for VC firms with good track records. Even firms that may be struggling now could recover well if in the next couple of years they’re able to sell off portfolio companies for a good return.
Limited partners are likely to be impressed with anyone who can make returns in the coming two years, said Kevin Delbridge, a senior managing director at Boston-based fund of funds HarbourVest Partners LLC. “For those that can prove themselves in this environment, there’s probably a story there,” Delbridge said.
That’s what Velocity hopes to do. “Right now, we’re focused on the portfolio,” said managing director David Vogel. He declined to answer questions about the size of the firm’s current fund, which is its second, or about the date of its founding.
He said the firm found a higher-than-usual bar to fundraising in this environment, but is looking forward to the exit of some of its portfolio companies. Last month, Velocity participated in an $8 million reinvestment round for CiDRA Holdings LLC, a Wallingford, Conn., maker of industrial flow measurement components. “We intend to do more of the same,” Vogel said.
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