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Venture Capital's Big Boys Getting Bigger Fewer private U.S. venture-capital funds are raising money to invest in startups, the National Venture Capital Association says. The biggest players are at the top, the smallest are at the bottom and the midsize firms watch the clock tick.

By Catherine Clifford

Opinions expressed by Entrepreneur contributors are their own.

Wallsave

The big just keep getting bigger in the venture-capital industry.

Most of the venture-capital money being raised is continuing to concentrate in the hands of a few big players, according to a report released this week from the National Venture Capital Association in collaboration with Thomson Reuters. In the first three months of 2013, 57 percent of the total private venture-capital fundraising was accomplished by five venture-capital funds at the top, the report says. Lately, it isn't unusual to see the majority of funding go to the biggest firms. In the second quarter of 2012, five private venture-capital firms raised 80 percent of the funds raised in the three-month period.

Institutional investors are backing the biggest venture-capital firms because they are turning a profit. They are also backing the smallest venture-capital firms because they want to have a finger in the early-stage funds that are narrowly focused on a specific, emerging trend, says John Taylor, head of research for the NVCA, an industry group based in Alexandria, Va. As investors pool resources into the two ends of the market, midsize firms are stuck.

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Also, the number of private venture-capital firms doing any fundraising at all has been shrinking. In the first quarter of 2013, 35 venture capital funds raised $4.1 billion. In the first quarter of 2012, 53 venture capital funds raised $4.7 billion. Looking further back, in the first quarter of 2011, 49 venture capital funds raised $8.1 billion. Several large funds have ducked out of the market completely this year and won't return until 2014 and beyond, John Taylor, NVCA's head of research, says in a statement.

That's because venture capital firms can't go out to their investors or limited partners and ask for more money until they return money from the last fund. "That has been challenging for a number of firms," says Emily Mendell, vice president of communications at NVCA. The system feeds on itself: Those firms that fund startups which turn a profit quickly are able to go out and get more money to invest quickly.

Related: Dominate Your Industry: How to Become the Best in Your Field

Those venture-capital firms stuck with startups unable to exit successfully are in a holding pattern. Part of what is keeping midsize private venture-capital funds sidelined is the weak exit market, according to Taylor. The exit market includes both initial public offerings and mergers and acquisitions. Last week, the NVCA reported that there were eight venture-backed IPOs during the first quarter of 2013, representing a 58 percent decline compared to the first quarter of 2012. Also, in the first three months of 2013, 77 merger-and-acquisition deals with venture-backed companies were reported, a 32 percent drop from the first quarter of 2012.

The shift doesn't mean that venture-capital funding is drying up. Corporate venture capital investors, from such companies as Intel, Nike and Pfizer have been stepping into the market. These corporate venture-capital investors don't need to fundraise and their available funds are not part of NVCA's fundraising data.

What will happen to the mid-level venture capital firms remains to be seen. Many need to exit their existing holdings and continue fundraising. "But the clock is ticking on all of that," Taylor says. In the meantime, Taylor expects the gap in funding left by midsize firms to be filled by smaller funds pooling together to support a larger company or the biggest firms making smaller investments in smaller companies. "That middle gap [will] eventually get covered by the big firms reaching down and the small firms forming syndicates and reaching up," he says.

Related: JOBS Act Expected to Increase Diversity in Funding

As the venture-capital industry shifts, entrepreneurs will need to be especially savvy about selecting the right funding partner. Be sure to pitch your startup idea to a venture-capital firm that specializes in your industry. "The matching up is absolutely key as a first step because an entrepreneur is wasting his or her time if they go to a firm that is not a fit," Taylor says.

Have you been seeking a mid-level venture-capital investment? What has your experience been like? Leave a note below and let us know.

Catherine Clifford

Frequently covers crowdfunding, the sharing economy and social entrepreneurship.

Catherine Clifford is a senior writer at Entrepreneur.com. Previously, she was the small business reporter at CNNMoney and an assistant in the New York bureau for CNN. Catherine attended Columbia University where she earned a bachelor's degree. She lives in Brooklyn, N.Y. Email her at CClifford@entrepreneur.com. You can follow her on Twitter at @CatClifford.

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