VC funds go on crash diet.

Byline: Katherine Goncharoff

"Small is beautiful" is the new fund-raising mantra for venture capital firms, including blue-chip players such as Sequoia Capital and Kleiner Perkins Caufield & Byers, which are seeking to raise new funds in 2003.

Both established Silicon Valley VC firms and their younger, less-famous counterparts have scaled back their fund-raising goals for this year, reflecting the dramatic drop in startup valuations, the slowdown in deal flow and the horrid returns venture capital industry registered in 2002. According to recent figures released by the National Venture Capital Association, U.S.-based venture capitalists reported a 22.3% drop in their internal rates of return in 2002.

Worse still for VC firms hoping to raise money this year are rising performance disclosure demands from old limited …