Dan Primack

As we warned a few days back, the first quarter was not kind to venture capitalists. Actually, it's more that venture capitalists weren't kind to entrepreneurs. Or perhaps the economy wasn't kind to limited partners, which caused venture capitalists to hoard their (still-considerable) cash. No matter how you pick your posit, the end result is that venture capital investments were shockingly low over the first three months of 2009. Venture capitalists invested just $3 billion into 549 companies last quarter, according to data released this morning by the MoneyTree three (PwC, NVCA & Thomson Reuters). That's a 47% dollar drop from the $5.7 billion disbursed in Q4, and a 61% drop from the $7.74 billion disbursed in Q1 2008. The number of companies funded didn't decrease quite as dramatically -- suggesting that lowered valuations partially helped drive down the dollar numbers -- but still were off 36% and 43.8%, respectively. Every major industry sector experienced double-digit declines, while the percentage of first-time fundings stayed constant at around 20% (although the value of such deals fell by 48%).

The New York kickback scandal made new headlines yesterday, after state Attorney General Andrew Cuomo filed a criminal complaint against Raymond Harding, former chair of New York's Liberal Party, for scheming with the already-indicted David Loglisci and Hank Morris. Cuomo also coaxed a guilty plea and financial remuneration out of Barrett Wissman, a crooked former hedge fund manager. You can read more here, including the Harding complaint. All of this got me to thinking more about the issue of raising fund capital from public pension systems, a process that often is just begging to be corrupted. Inexperienced and smaller GPs can have real difficulty getting in front of a pension system’s investment staff, because there is rarely a transparent or streamlined process. The result is that many of these GPs hire a “finder,” which is typically a politically-connected individual who can gain access from the top-down. Most of these finders aren’t splitting their fees with the pension system’s investment staff – a quid pro quo that allegedly occurred in New York – but even the most above-board of these relationships boils down to influence peddling.

Dataxu, an online advertising startup run by former Enpocket and Nokia Interactive chief Michael Baker, has raised just over $6 million in first-round funding, according to a regulatory filing. Backers include Atlas Venture and Flybridge Capital Partners, with Jeff Fagnan (Atlas) and Jeff Bussgang (Flybridge and prolific peHUB contributor) joining the company's board of directors. Dataxu (pronounced data-zoo) was founded in 2007 by MIT professor Ed Crawley. Its first CEO was Bruce Journey, who had spent the prior decade as publisher of the MIT Technology Review. It's not exactly clear when he turned the reins over to Baker, as their LinkedIn profiles have conflicting dates (Journey claims to have been CEO though last month, while Baker's says he took over in September 2008). I tried leaving a voicemail for Baker, but was instead (repeatedly) directed to Journey's recording.

First quarter Moneytree figures aren't being released until this weekend, but here's a sneak peak of what our headline will read: Oh, The Horror. According to preliminary data viewed by peHUB (via the VentureXpert database), U.S. venture capitalists disbursed fewer dollars in Q1 2009 than in any other quarter since at least 2003. It might actually be a bit worse than that, but I'm building in a few hundred million dollars worth of last-minute data entry. If the numbers were to remain completely static (which they won't), then you'd have to reach all the way back to 1997. VentureSource -- the VC data group owned by Dow Jones -- is showing something similar. More specifics when the numbers become official, but I figured you'd want to know that it's gonna be ugly. Real ugly.

It's been a busy day for venture capital firm Accel Partners. First, partner Jim Breyer agreed to join Dell's board of directors. Just a few hours later, Accel was identified as one of the investors helping StumbleUpon's founders to repurchase the company from eBay. So I spent a few moments on the phone with Breyer, and here's an edited transcript: Why join the Dell board of directors? Breyer: We are very big believers at Accel in founders becoming more and more important over time -- not just at the inception of the business. The very best companies are led by founders for a long period of time, and Michael Dell has obviously done so many of the right things in the right that that he is a model for entrepreneurial founders that are building their businesses. Michael and I spent time together at the World Economic Forum in Davos this past January, and had a series of conversations. I went back and spoke to many of our entrepreneurs and my partners. The feeling was unaninous that working with Michael and Dell would be very valuable for the portfolio companies. We strongly believe that there are still enormous opportunities in some of the platforms being created today, like social networks and cloud computing and storage. Dell, in many ways, sits at the intersection of those things.

After seven years as a contract physical innovation center, Inventables Inc. is trying to transform itself into an online B2B marketplace. The Chicago-based company also has raised $2 million in its first round of VC funding, led by True Ventures. “We’ve been talking to [Inventables CEO] Zach Kaplan for almost a year,” says Phil Black, a True Ventures partner who has joined the Inventables board. “This round of funding really does allow the company to make a clean break with the past. The B2B marketplace strategy is a lot more risky than what they’ve been doing, but it’s also got the potential to be much more rewarding.”

Forty U.S.-based venture capital firms raised just $4.3 billion in the first quarter of 2009, according to data released this morning by Thomson Reuters and the National Venture Capital Association. The downside is that this represents the lowest number of funds to raise capital since Q3 2003. The upside is that the actual amount of capital raised was higher than the $3.5 billion raised in Q4 2008 (slight solace, but solace nonetheless). Just three of the funds were first-timers, while the largest raiser was August Capital ($650m for Fund V). In a prepared statement, NVCA president Mark Heesen said: "First, the majority of venture firms are not actively fundraising at this time because they have either recently raised a fund

Earlier this year, Tom Friedman got knocked around for suggesting that some of the stimulus cash be redirected to venture capital firms. Now, a version of that idea might actually be gaining some traction. Innovation America, a nonprofit public/private partnership, and The National Association of Seed and Venture Funds (NASVF) are lobbying for a $2 billion fund-of-funds that would be used to shore up state investment programs and angel groups. Richard Bendis of Innovation America says that the groups had initial talks with the Obama transition team back in December, at which point the proposed program stood at just $1 billion. Bendis says that the government reps requested additional information, at which point Innovation America and NAVSF conducted a survey to demonstrate the difficulty young companies face in raising venture capital. Even though the survey was unscientific, the feds responded that $2 billion sounded like a more appropriate figure (insert jaded sadness here). Bendis says that the first $1 billion would come out of the stimulus package, perhaps from an organization like the Small Business Administration. It would then be allocated to various groups under the auspices of Innovation America, with third-party investors being asked to match the federal contributions on a dollar for dollar basis (bring us to the $2b figure). Kind of like PPIP for the entrepreneurial set.

Highland Capital Partners has begun raising its eighth venture fund, with a target of around $400 million. That’s pretty large for a typical VC fund, but small for a firm whose past two vehicles came in at around $800 million (it also raised $300m for a consumer-focused fund). So, what gives? The basic answer seems to be that Highland might be putting common sense above fee-mongering. I know, they might get kicked out of the club (at which point they can just retreat to Wyc’s Lexus Club in the Boston Garden). Here’s what I mean: Both fund-raising and deal-making volumes are deflated right now, due to things like LP liquidity constraints and decreased valuations. So Highland will raise less now and, if the environment improves, go back out for a larger fund sooner than it normally would. If times stay tough, then it’s sized appropriately for a normal investment cycle.

Last Friday, we reported that oil and gas exploration company Terralliance is on the brink of implosion, despite $295 million in VC funding and an undisclosed amount of debt funding (which the equity backers were furiously trying to renegotiate). This morning, VentureWire’s Russ Garland moved the story forward, with the following three pieces of information: The debt funding amount was $150 million, from hedge fund Passport Capital. Terralliance has been in violation of the loan for months. Terralliance claimed that its mapping technology was 93% accurate, but that figure turned out to be massively inflated. As an aside, my understanding is that the numbers were initially correct (a few lucky strikes), but quickly debunked by Terralliance scientists. Terralliance began conducting its first-ever audit in December 2007, at the behest of a new potential investor. That final point about the audit is also what I’ve been hearing, and is why I originally suggested that the investors were “asleep at the wheel.” How do you not audit a company that has received around $450 million in capital, has scooped up oil and gas leases on several different continents and has purchased multiple Russian aircrafts