Venture firms struggling to raise funds, especially those that favor early-stage startups

This year, a jittery global market, a tumultuous IPO window, sinking investor confidence have tested the startup bubble. Now, a new report shows venture capital funds, especially early stage-focused funds, are struggling to raise money to pass on to startups.

According to newly revealed statistics from Dow Jones LP Source, a total of 32 venture funds in the United States were able to raise $2.2 billion during the third quarter of 2011.

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This figure represents a 24 percent drop from the Q3 2010; during that period, 40 VC funds raised $2.9 billion.

“As limited partners continue to show a strong preference for investing with only the most prominent firms, the number of funds and the amount of capital committed have shrunk,” said Dow Jones VentureWire editor Scott Austin in a release.

“If this trend continues, entrepreneurs will face greater competition for capital and other investors, such as angels and corporations, may find opportunities to invest in deals that, traditionally, would have been done by venture firms.”

During the first three quarters of 2011, venture fundraising in the States showed a 9 percent increase; however, more than half of that fundraising ($10.6 billion raised by 90 funds) was wrapped up during the first quarter.

In other words, the second half of the year, which saw massive instability in financial markets around the world, seems to have had a profound and palpable impact on private equity.

An interesting pain point was early-stage funds. Limited partners seemed particularly skittish about this high-risk area, instead favoring multi-stage funds. In early-stage fundraising, 52 funds collected $2.1 billion in the first three quarters, a 41 percent drop year-over-year. Multi-stage fundraising, however, was level year over yearas 28 funds raised $5 billion so far this year.

Outside the U.S., European venture capital fundraising might hit a record low in 2011. So far this year during the first three quarters, 25 funds raised just $1.8 billion. This activity is 31 percent less than the funds raised during the first three quarters of 2010.

Image courtesy of mslivenletlive.

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