Despite Slump, Venture Firm Sets Up $575 Million Fund

Clare Cain Miller|The New York Times

Even amid the contraction of the venture capital industry, which fertilizes the seeds of new technology start-ups, some firms are expanding.

On Monday, Greylock Partners, which has backed Facebook and LinkedIn, announced that it had put together a new $575 million fund, one of the biggest to be created in the last year. It has also hired a new partner, Reid Hoffman, the founder of LinkedIn and an active investor in early-stage start-ups.

The venture industry has been pummeled in the last year by dismal conditions that have made it difficult for start-ups to go public or be acquired by bigger companies. Many have predicted that the number of venture firms could shrink by as much as half.

The list of firms that have managed to raise funds in the last year provides a glimpse of how the venture capital landscape will look once the shakeout ends. In addition to Greylock, the firms include Khosla Ventures, Sequoia Capital and Accel Partners.

The endowments, pension funds and foundations that invest in venture funds have been cutting back because of losses in their portfolios and shrinking returns in venture capital. In the third quarter, only 17 venture firms raised fresh capital, down from 63 in the same period last year and the lowest number since 1994, according to the National Venture Capital Association.

“It’s clear that Greylock is in the top handful on anyone’s list,” said Andrew K. Golden, president of the Princeton University Investment Company, which manages the university’s endowment and has invested in the new fund. “As an asset category, venture is not that attractive. But we say investing is like love and tennis — you choose your partner right and everything else takes care of itself.”

Princeton, like most other universities, has cut the amount of money it invests in venture capital, and the undisclosed amount it has committed to Greylock represents almost all of its venture investment for this year, Mr. Golden said.

One criticism often leveled against the venture industry these days is that it has too much money, which leads to copycat investments, unrealistic company valuations and worsening returns.

Ten-year returns for venture capital, which reached 36 percent in 2000 at the height of the dot-com bubble, shrank to 14 percent in the period ending June 30, according to Cambridge Associates, though venture capital has still outperformed the public markets.

David Sze, a partner at Greylock, said that about half a billion dollars was the ideal fund size because it allowed the firm to invest in a range of deals. It often invests $250,000 to $6 million in young companies, as it did with LinkedIn, Digg and Workday. But it has also invested up to $25 million in growing companies, as it did with Pandora, Zipcar and OutlookSoft.

Mr. Hoffman has been actively mentoring entrepreneurs and investing in their companies since 2002, when PayPal, where he was an executive vice president, was acquired by eBay for $1.5 billion.

He founded LinkedIn, a social network for professionals, in 2003. Mr. Hoffman has proved to have an eye for nascent ideas that have the potential to become significant businesses. He has invested about $4 million in some 85 start-ups, including Facebook, Mozilla, Zynga, Digg and Flickr.

He attributes his success to working at and founding companies himself. Another criticism of the venture industry is that it has become overpopulated with people with business degrees but no actual experience.

“The current next generation of great V.C.’s will be folks who have a depth of operating experience, preferably even company-founding experience,” Mr. Hoffman said. “It’s critical for being really helpful to entrepreneurs to actually have experienced the problems yourself.”

Mr. Hoffman, who is executive chairman of LinkedIn, will continue to work from his LinkedIn office in Mountain View, Calif., with frequent visits to Greylock, which is in San Mateo.

He did not know which idea might catch his eye next. “You have great entrepreneurs come in and bring you a really interesting idea you hadn’t envisioned,” he said.