Nothing is what it seems.

Two new funds are coming in at over $1 billion, each at a time when venture capital firms are stretched to their limits. Accel Partners is closing a fund of more than $1 billion, Redherring.com has learned, and TH Lee.Putnam Internet Partners (THLi) announced this week it closed its first venture capital fund of $1.1 billion.

VC firms continue to raise massive funds, even as their portfolios are bulging with startups that were expected to be trading on the stock markets by now. A market downdraft that began in April has caused almost all startups to put their IPO plans on ice indefinitely. (See "IPOs are DOA.")

Instead of comfortably monitoring their companies' stock performance and waiting to relinquish their board seats, VCs say they're spending much of their time scrambling to make sure the companies survive. To help cope, some VCs are beginning call on outside consultants so they -- and their portfolio companies -- can keep up with an economy pulsing at Internet speed. Outfits that are offering their services to VCs include McKinsey & Co., Andersen Consulting, and market researcher Aberdeen Group (see "Let me help you with that VC").

HO HUM, ANOTHER BILLION

Billion-dollar venture funds have become commonplace. U.S. VC firms have raised at least 17 funds worth $1 billion or more, according to Venture Economics. Those in the club include Benchmark Capital, Oak Investment Partners, Summit Partners, and CMGI @Ventures, which has two billion-dollar funds.

Accel's new fund could reach as high as $1.6 billion, according to one source close to the firm. General partner Jim Swartz would only say it's "$1 billion-plus." Accel currently manages $1.3 billion in investments. Just six months ago, the firm raised $600 million between two funds, Accel VII and Internet III. At that time, managing partner Jim Breyer said the firm turned away investors who wanted to chip in $400 million more because Accel was satisfied with what it raised. Accel also comanages a $1.1 billion fund, Meritech Capital, with Redpoint Ventures, Brentwood Venture Capital, Oak Investment Partners, and Worldview Technology Partners.

BILLION-DOLLAR DEBUT

When THLi set out to raise its first VC fund last fall, it was hoping to raise $650 million, and it easily raised that much in a couple of months, says Jim Brown, the firm's managing director.

Executives at the firm deliberated heavily before accepting $1.1 billion from 130 limited partners, half of which are clients of Thomas H. Lee Company, a private investment firm that's part owner of THLi.

THLi decided to go for the big money and doubled its staff to four managing directors, five vice presidents (one spot is open), and six associates. Six of the firm's senior executives came from GE Equity, the private investment arm of GE.

New York-based THLi will invest in startups of all stages, not because it likes variety, but because it's not feasible to make only early-stage investments with such a large fund. Early-stage investments can require five times more attention than later-stage investments, VCs say. "We just don't have the time," Mr. Brown says.

THLi's managing directors and vice presidents each will manage up to ten startups, Mr. Brown says. The firm will invest an average of $15 million to $20 million in 35 to 50 startups.

THLi realizes things have changed a lot since last year, when VC firms could expect to invest in companies and take them public in less than six months. It plans to spend up to three years with its portfolio companies before they exit through IPOs or sales to other companies, Mr. Brown says.

PRESSED FOR TIME

Based on comments at the Early Stage Venture Capital Alliance (ESVCA) meeting this week, THLi is right not to focus exclusively on early-stage deals. The few dozen early-stage VCs at the group's roundtable meeting in San Francisco said they're beginning to feel overwhelmed, says Vince Occhipinti, the organization's chairman. He's also managing director and cofounder of Woodside Fund.

Representatives from 30 West Coast VC firms attended the meeting. Those in attendance cited lack of time available to spend with portfolio companies as a major concern. "Most of the VCs are feeling a tremendous amount of time pressure," Mr. Occhipinti says.

SILVER LINING

While pressed for time, VCs find themselves working in an excellent investment climate. Valuations of startups ready for later-stage deals have dropped up to as much as 70 percent, and early-stage valuations have dropped up to 50 percent, Mr. Occhipinti says.

Some VC firms are hiring more associates, if not partners, to spread the workload, he says. That's not the case at Woodside.

Its latest fund of $140 million seems slim by today's standards, but it's more than three times as fat as its last one, a $40 million fund raised in 1995. Despite the increase, Woodside will invest in the same number of startups, approximately 20. The increase in fund size reflects the amount of money it costs companies to get going these days, not a change in Woodside's investment strategy, Mr. Occhipinti says.

MONEY AVAILABLE, BUT DOORS CLOSED

Even though it's much, much larger than Woodside, Accel says it, too, has no plans to change its investment strategy even though it has raised the largest fund in its history. It has added two partners in the past two years -- and it recently hired its first chief operating officer -- but it doesn't need a major chunk of new partners, says new partner Jim Goetz.

Accel plans to continue to make the same number of investments (about 40 per fund) it has in the past, just much bigger ones. A few years ago a typical investment in an optical networking company ranged from $5 million to $10 million, but those figures have shot up to $30 million to $50 million today, Mr. Goetz notes. "If you want to create a marketing-leading, first-mover company, the capital requirements are going up," he says.

The new money will not distract Accel into chasing new markets that it doesn't understand. If you raise a huge new fund and start to jump into markets you're not an expert in "you end up diluting yourself in terms of your domain expertise and the bandwidth that each partner can apply to each company," Mr. Goetz says.

Based on Mr. Goetz's comments, Accel appears to be the exception in today's VC biz. Some VCs are turning away entrepreneurs when their firms are flush with money to invest. There are many partners in Silicon Valley VC firms that have stopped meeting with entrepreneurs and have stopped making investments because they simply don't have the time, says Rich Shapero, managing partner at Crosspoint Venture Partners.

Those VCs won't admit openly that they're ducking entrepreneurs' phone calls or declining to meet with startups, because their deal flow would grind to a halt, he says.

CATCHING THEIR BREATH

The volatile stock markets are providing some relief for VCs because they're getting a break from an exhausting run of IPOs, Mr. Shapero says.

However, this short-term relief could mean more pressure for VCs in the long term.

VCs who normally would be severing ties with startups that were expected to go public this spring and summer will be in tough spots later this year and in 2001.

VCs typically step down from their seats on a company's board six to 12 months after it goes public. Because very few companies have gone public, VCs could end up with more companies than they can manage.

Mr. Shapero, an eight-year veteran at Crosspoint, knows it. He manages 14 of the firm's portfolio companies, six of which had planned to go public by the end of this month. Only one, iBEAM Broadcasting, made it out. Market conditions will make it difficult for him to make new investments, he says.

Instead of slowing its investment pace, Crosspoint is taking advantage of the dip in startup valuations. The firm is on pace to bump up its number of annual investments by 50 percent. Crosspoint has invested in 19 companies so far this year, after investing in 25 companies in 1999, he says.

"The workload certainly has enhanced, I'll say that," says Mr. Shapero, who after dinner every night responds to email for four hours until his eyes close. "We're running as fast as we can."

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