Venture Firms Seeking Cash for Annex Funds

U.S. venture capital firms, short of cash like many of the Internet-related start-ups they spawned, are asking investors for more money to shore up some of their businesses.

New Enterprise Associates, which invested in more companies than any venture firm last year, wants to raise $150 million, and Accel Partners is seeking $50 million to $75 million. It is the first time they’re raising so-called annex funds, which channel money to companies that they anticipated would be self-sustaining by now.

Though some investors have rejected the requests, for reasons including concern they may be throwing good money after bad, most have agreed to help the venture firms keep some of their companies afloat in hopes of ensuring future returns.

“Both [New Enterprise and Accel] essentially said ‘mea culpa.’ The markets have changed,” said Sandra Ell, treasurer of the California Institute of Technology, which voted last week to invest in both annex funds. “We may not like it, but it is what it is.”

During the height of Web mania, some venture firms invested entire funds in a year or less, compared with a more typical three to five years. With the investor exodus from start-ups, the firms are now assuming the financing burden they once counted on others to take in initial public offerings or late-stage private-equity funding rounds.

Baltimore-based NEA plans to add to its 1998 fund of $565.7 million, said Richard Kramlich, co-founder and general partner in the firm’s Menlo Park office. Even though the fund kept 45% in reserves, he said, cash demands increased with stakes in capital-intensive communications start-ups and the inability of some companies to go public.

Accel wants to back up its 1998 fund of $310 million, said Alan Austin, the Palo Alto-based firm’s chief operating officer.

Some of the original fund’s corporate investors, which include Microsoft Corp. (ticker symbol: MSFT), Lucent Technologies Inc. (LU), Nortel Networks Corp. (NT), and Compaq Computer Corp. (CPQ), have said they won’t participate in the supplemental fund, Austin said.

Venture firms usually reserve one-third to one-half of a fund for additional investments in portfolio companies until they generate enough cash to cover expenses. Because many firms try to limit cross-investing between funds that are raised in different years, they resort to annex funds if they underestimate reserves.