Why Is New York VC Fred Wilson Raising So Much Money?

Fred Wilson has invested early on in some of the biggest startup success stories of the past five years including Etsy, Twitter, Foursquare and Zynga. He's known as the dean of New York City venture capitalists, an emerging community that has tracked nicely with the rapid uptick in startups in the Big Apple. Now, the word is out via TechCrunch (like DailyFinance, owned by AOL) and other outlets that Wilson is raising a new $200 million venture fund and already has $135 million in commitments.

This is interesting. Not too long ago, Wilson claimed he was getting worried about seemingly bubble-like activity in the venture capital world with huge demand for hot startups and very steep valuations. On the other hand, Wilson also said he believes that venture capital is seeing a nice revival, led largely by seed-stage investing.

All of which begs the question: Why raise a $200 million fund for seed-stage investing? Those investments tend to run $1 million max. After all, literally billions of venture funding is sitting on its hands in Silicon Valley waiting to find a happy startup home (part of the reason why this market has gotten so heated).

A New Stage for Internet Businesses

A couple of possible answers. First, Wilson probably still sees tons of opportunities out there.

And he may be right. Internet-driven businesses seem to be entering a second rapid growth stage. Mobile revenues are clearly starting to soar, based on the approaching ubiquity of smartphones. The rise of cloud computing is proving to be a huge game-changer for both large companies and startups alike. And it has never been cheaper or easier to launch a starup.

So while a $200 million fund goes a long way, it may mean Wilson sees that much more opportunity. He will, it appears, be adding a fourth partner to the roster of his firm, Union Square Ventures, which implies the partners will increase their portfolio size by 33% (USV tends to invest more or less in the same number of startups each year).

Protecting His Interests

A second reason is the need for big-ticket follow-on funding.

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A lot of the companies WIlson has invested in have very high valuations but remain privately held. In their subsequent funding rounds, those companies have raised huge amounts of capital. Tumblr just got $30 million. Etsy raised $20 million. Zynga and Twitter have both raised big chunks.

For USV to keep a seat at the table and protect its interests in later rounds, it needs to be able to participate in later rounds (as it has done). That requires big capital to keep up with the big valuations. It will be needed for only a small number of companies in the USV portfolio (a 10% home-run ratio is considered quite good in VC). But it does need that capital, regardless.

At any rate, watch what Wilson does closely. And you can read about it on his popular blog, AVC.