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Venture capital firms are sitting on an estimated $68 billion in funds that they have yet to invest in startup companies, according to a new survey. The giant uninvested pot, along with signs that venture capitalists are once again in a spending mood, are the latest rays of hope in the ravaged startup sector. For Silicon Valley law firms, which depend on a steady stream of startups to fill out their client base, the developments are especially welcome. “It just feels like there’s another segment of our business that’s healthy again,” says Steven Bochner, a corporate partner at Palo Alto, Calif.’s Wilson Sonsini Goodrich & Rosati who represents both private startups and public companies. The amount of money raised by VC funds has plummeted during the last several years. According to VentureOne, the industry research firm that conducted the survey, VC funds raised a little more than $8 billion last year compared with the high-water mark in 2000, when they raised some $83 billion. But of the $83 billion raised in 2000, the funds have still not invested 25 percent of the money. And more than half of the VC money raised in 2001 is still on the table. The result is a so-called overhang of $68 billion, which is expected to be plowed into fledgling companies over the next couple of years. The fact that the funds have not yet invested all their money is not in itself unusual. Venture capital funds typically build a portfolio of companies by doling out the money they’ve raised to various startups over a four- or five-year period. But according to many attorneys who specialize in the venture capital sector, the VC funds were particularly parsimonious in the wake of the dot-com bust. “Even though they had all that money, they just weren’t putting it to work. There was a reluctance to invest in new deals,” says Mark Medearis, a partner at Heller Ehrman White & McAuliffe’s Venture Law Group in Silicon Valley. Now, he notes, venture capital firms are starting to loosen the purse strings again, even fighting among themselves to invest in startup companies. “For the first time in quite a while, there’s starting to be competition for deals,” Medearis says. Wilson Sonsini’s Bochner estimates that he’s handled three or four funding deals in the last two months in which multiple venture capital firms have been interested in being a major investor. Representing startups in their funding deals alone isn’t what’s causing optimism. The fees from venture funding deals aren’t nearly as lucrative as they are in other types of corporate work. “Typically, M&A or IPO fees are 20 to 30 times what a typical venture capital fee would be,” says Peter Astiz, the chair of the corporate and securities group at Gray Cary Ware & Freidenrich in East Palo Alto, Calif. “Venture capital transactions are designed to be done at a fairly low cost to allow the companies to put as much of that money to work,” says Astiz. But representing a startup early on is the best way to get tapped down the road, when the company starts doing strategic deals such as licensing transactions, joint ventures, and product purchase arrangements. For many Valley lawyers, the $68 billion overhang increases the likelihood that the startups they represent will continue to get vital funding rather than dying on the vine. “A lot of the companies that were funded in 2000 required a lot of capital to make it to where they are today,” says Medearis. “The ones that are still around, many are starting to do quite well, but they’re going to need capital.” Alexei Oreskovic is a reporter at The Recorder, the American Lawyer Media newspaper in San Francisco, where this article first appeared.

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