Editor’s note: Matthew Burns has covered venture capital for Local Tech Wire since its launch.Intersouth Partners, North Carolina’s largest venture capital firm, plans to announce Monday that is has raised the state’s largest venture fund, a $205 million investment pool that is the firm’s sixth in 18 years.

This immediately raises the question: Why?

Venture investing is at its lowest point in four years, both nationally and across the Southeast, and the industry shows no signs of breaking out of the doldrums that have gripped it since the middle of 2000. Limited partners everywhere are bearing down on venture firms, asking for their money back or lower management fees –

Intersouth reportedly dropped its fee by a half a percentage point, to 2 percent, for the new fund – or other concessions because their money is more often than not sitting on the sidelines, although that might be a selling point for funds in the current climate of negative returns.

Data compiled by Local Tech Wire shows that 24 venture deals were completed in the Carolinas and Georgia during the fourth quarter of 2002 for a total of $223 million, down considerably from the 35 deals for $260 million completed in the third quarter.

Slow year in 2002; 2003 sluggish, too

For the year, the region raised more than $990 million in 120 deals, the first time since 1998 that the Southeast failed to break the $1 billion mark in venture financings.

And a change in the calendar hasn’t changed the industry’s fortunes. For the first six weeks of 2003, a paltry five deals for about $28 million have been completed.

North Carolina led the region during the fourth quarter, with 14 deals totaling about $153 million. Georgia saw eight deals for $62 million, while South Carolina closed two deals for $7 million.

Top deals included Targacept of Winston-Salem raking in $46 million in North Carolina’s largest deal of the year, TriVirix International of Chapel Hill bringing in $25 million, Amphora Discovery of Durham closing on $23 million and Atlanta-based WebTone Technologies landing $20 million.

Although biotechnology companies got most of the big money, software was the industry of choice among investors for a change. Twelve software deals were closed during the quarter, compared to just five biotech deals. Three investments also involved computer hardware, possibly signaling that information technology deals might finally be coming back into favor after a prolonged slump.

Sitting on funds

Still out of favor, however, are early-stage deals. First-round financings accounted for just five of the fourth-quarter deals, compared to a dozen expansion-stage deals (second and third rounds) and six later-stage deals (fourth round and beyond).

Intersouth, for its part, took part in only two deals during the quarter, leading an early-stage investment in software developer SmartPath and a later-stage funding in microwave hardware maker Lambda Technologies. For the year, the firm made 13 investments worth almost $26 million, according to the MoneyTree Survey published by accounting firm PricewaterhouseCoopers, the National Venture Capital Association and the Venture Economics research firm, and almost all of those were follow-on rounds for existing portfolio companies.

In information supplied to LTW a year ago, Intersouth indicated it had invested about half of the $183 million fifth fund raised three years ago, which means it still has about $65 million in reserve to support its current portfolio companies through follow-on rounds.
Other venture firms also continue to sit on their money, having put such tight screens on the criteria a startup must meet before the VC will even consider an investment.

Aurora Funds of Durham is about two-thirds of the way toward its goal of a $75 million fourth fund but has tapped the money just three times for deals, including Cropsolution and Regado Bioscience in the Research Triangle area, but has made no new investments since last July.

Durham-based Southeast Interactive Technology Funds has closed just one deal, a December investment in BuildLinks of Cary, out of a $100 million fund announced last spring.

Although it isn’t putting together a new fund, Noro Moseley Partners of Atlanta still hasn’t deployed much of the $320 million fund raised in 2000, and partner Alan Taetle recently told LTW that the firm doesn’t have a new deal close to closing following its recent investment in e-business software company nuBridges.

Intersouth founder Dennis Dougherty has said he wants to invest the new fund over four years, but one wonders where the firm will find enough deals to dole out $50 million a year from now until early 2007.