Piles and Piles of VC Cash

In an eye-popping example of just how frothy the Silicon Valley venture-capital arena has become, the white-hot venture firm Benchmark Capital has raised two-thirds of a new fund that ultimately will amount to $1 billion.

The six-partner firm that's been in existence for just four years has received commitments of $650 million from institutional investors, after having begun soliciting them two weeks ago, according to general partner Robert Kagle. It plans to collect an additional $350 million from individual investors -- including the partners themselves -- over the rest of the year. The billion-dollar fund, Benchmark's fourth, would be the largest amount ever committed exclusively to early stage venture-capital investments. It also would be nearly six times the size of Benchmark's previous fund, which it raised only last November.

Benchmark has rocketed to a pre-eminent position on Silicon Valley's famed Sand Hill Road in Menlo Park, Calif., largely on the strength of its early investment in online auctioneer eBay (EBAY). Benchmark turned a $5 million eBay investment in 1997 into one valued today at $3.7 billion. Other Benchmark successes, albeit at earlier stages of development than eBay (which went public almost a year ago) include software companies Red Hat Software (RHAT) and Ariba (ARBA), online mortgage broker E-Loan (EELN) and next-generation phone-service provider Northpoint Communications (NPNT).

According to Kagle, until about a month ago Benchmark's partners were considering selling shares in the firm to public investors. It may seem impossible for a financier with a 740-bagger in his portfolio to be envious of a competitor, but Kagle and his pals clearly cast a covetous eye at CMGI (CMGI) and Internet Capital Group (ICGE), two publicly traded venture firms whose market valuations far exceed the value of their underlying assets or profitability.

"If you look at the valuations of ICG and CMGI, they're astronomical," says Kagle. Nonetheless, he says Benchmark spurned the IPO route because it wants neither the distractions of public investors nor the strictures of potentially increased regulation. "We need to be able to work with two guys and a napkin," he says.

That's not to say that Kagle and partners Andrew Rachleff, Kevin Harvey, Bruce Dunlevie, David Beirne and William Gurley can't afford expensive napkins. Benchmark IV (venture capitalists favor the Super Bowl nomenclature for their funds) will have a management fee of about 2%, and its terms dictate that 30% of the profits go to the general partners, a provision known as the "carry."

Limited partners, which include giant funds like the Ford Foundation and Hewlett-Packard's (HWP) pension fund, have been eager to throw even more cash at Benchmark.

"They've put together a very talented team and a sound process," says Fred Giuffrida, managing director of Horsley Bridge Partners, a San Francisco "fund of funds" that places its investors' money with other funds and has invested in each of Benchmark's funds. "They've proven their ability to add value to companies in a very dramatic way."

Benchmark isn't the only Silicon Valley venture firm collecting cash. In fact, just as Wall Street firms tend to follow a pack mentality, so too do the powerful VCs of Silicon Valley. CMGI's @Ventures arm has informed investors it may soon ask for additional capital in order to avoid the ardor of raising a new fund. "We're looking at a number of different options," says @Ventures partner Peter Mills.

Accel Partners is in the process of completing a two-fund, $600-million funding round. James Breyer, managing general partner, says the firm had more than $1 billion in commitments but limited the new fund to what it felt it could spend. And Softbank Technology Ventures recently closed a round, also of $600 million.

Sequoia Capital, an early backer of Yahoo! (YHOO) and eToys (ETYS), is rumored to be raising a new fund. "We just do this sort of stuff quietly -- no hoopla -- no announcements -- just business," says Sequoia general partner Michael Moritz, in an email. "It's amazing how much time and money you save with no announcements, no tombstones, no glitz, no distractions."

Lastly, Kleiner Perkins Caufield & Byers, still the king of the heap on Sand Hill Road, last raised $460 million (KPCB IX) in April and has no current plans for additional fundraising, says CFO Michael Curry.

This incomplete list details only the activities of the most elite firms. Other companies are raising hundreds of millions more. But what is most remarkable about the current wave of financing, beyond its size, is the speed with which the firms are spending their hoard.

Benchmark's Kagle says the partnership has invested its first three funds in an average of about 18 months, compared with the two to three years that once was the norm in the venture business. "We're determined to make this a three-to-four-year time period," he says.

Of course, all this begs the questions of why these firms feel compelled to raise so much money and if they'll be able to replicate their triple-digit annual returns in the new funds. Accel's Breyer notes that "we do not believe the returns we've had are sustainable." And Kagle acknowledges that Benchmark merely is following the same advice it doles out to its portfolio companies: "Raise capital when it's available."

There's probably never been another time like this to be an entrepreneur. Expect to see even more entrepreneurs -- including some who don't even know they're about to become ones -- as long as Benchmark and its ilk have billions hanging out of their pockets waiting to be snatched up.

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