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Surveys
Show: Mid-Atlantic Venture Capitalists Expect to Do More
Deals
in 2002; Entrepreneurs Not So Sure
(March
6, 2002, Timonium, Maryland)
-- With signs of recovery in the investment climate
more visible, venture capitalists say they are ready to do
more new deals in the coming year but entrepreneurs are
skeptical and remain concerned about the lack of available
early stage capital in the region to fund their companies,
according to two surveys released by The Mid-Atlantic
Venture Association (MAVA) and the Morino Institute
Netpreneur Program. The
results were presented today at The MoneyTree forum, a
quarterly event hosted by PricewaterhouseCoopers in
partnership with MAVA to bring together entrepreneurs and
venture capitalists to gain insight into the current
investment environment and to delve more deeply into the
quarterly venture investment numbers.
The
surveys suggest that there is still caution on the part of
investors but that they believe the downward cycle has
halted and that the region is poised for an upturn.
“We’re
now seeing the positive signs that we were looking for last
fall but didn’t get.
The downward cycle we have been experiencing in the
region lasted longer than any us expected. In 2002, we should
see increased deal flow over 2001. However, the rebound
will be slow and will happen in small steps, sector by
sector,” said Kevin Burns, a MAVA Board member and
Managing Principal at Lazard Technology Partners in
Washington.
“Entrepreneurs
share the optimism of the VCs about the recovery cycle of
private equity,” said Mary MacPherson, Executive Director
of the Morino Institute Netpreneur Program. “But they
remain frustrated and concerned about - the lack of funding
for early stage companies.
These entrepreneurs are more seasoned than the
entrepreneurs we saw two and three years ago, they are
focused on the fundamentals – including revenue and
profitability, but
few are getting funding.”
Surveys’
Major Findings
A Surge in
Optimism about Private Equity in the Region
Venture
capitalists’ optimism about region increased dramatically
in Q1 2002 from Q4 2001. Forty-four percent of venture
capitalists surveyed in Q1 said that as of February 1, 2002,
they believe the region is beginning to see an upswing, a
figure that is up sharply from 14% who felt that way in
December 2001. The number of VCs who felt that the region is
flat but scraping the bottom dropped to 34.4% in Q1 2002
from 49% in Q4 2001. The
number of VCs who feel the region is still declining also
fell in Q1 to 16.4% from 28.1% in Q4.
Entrepreneurs
also believe the private equity situation in the region is
improving but are not quite as optimistic as the VCs. Just under a third
of entrepreneurs believe the region is beginning to see an
upswing and the majority of entrepreneurs (46%) said the
region is flat but scraping the bottom.
Both
VCs and entrepreneurs agree that the IPO market is unlikely
to rebound this year. Fifty-four percent of VCs and half of
the entrepreneurs said they do not expect the IPO market to
come back until 2003, and 16% of each group said they did
not expect it to come back until 2004.
VCs Are Ready To Do New Deals
The majority of VCs (68.3%) said they expect to do more
deals in 2002 than in 2001.
Nearly one third of VCs said they have between three
and five new qualified deals in the pipeline that they could
potentially close in Q1 2002, up 22% from those who said
they had that many deals in the pipeline in Q4 2001. While the amount of
capital available for new deals vs. existing portfolio has
remained fairly constant, the number of VCs who said they
had between $100 million and $299 million available for new
deals jumped considerably in Q1 to 16.4% from only 9.3% in
the fourth quarter. This
suggests that some VCs are allocating more capital for new
deals than they had in recent quarters.
VC
also indicated that they expect the ratio of new deals to
existing portfolio to be fairly high in 2002. Nearly 40% of
VC respondents said that of the deals they do in 2002, 80%
would be new deals and 20% would be existing portfolio;
another 16% of VCs said that 60% of their 2002 deals would
be new and 40% existing portfolio.
The
amount of time VCs are spending on aiding and protecting
their existing portfolio has also dropped. The number of VCs
spending 60% to 100% of their time aiding and protecting
their existing portfolio declined significantly in Q1 2002,
with 23% of VCs saying that they are spending that amount of
time in Q1, compared to 46% in Q4.
“These
findings seem to indicate that VCs are ready to get in the
game again. The
heavy lifting with the existing portfolio is largely
completed, so VCs have the time and the inclination to start
looking at new deals. There
is also plenty of fresh powder in the region to invest,”
said John Burton, a
MAVA Board member and Managing Partner at Updata Capital in
Reston.
Early Stage
Money Crunch Continues
Entrepreneurs,
however do not sense that VCs in the Mid-Atlantic are ready
to do deals and expressed great frustration at their
inability to raise seed and early stage capital for their
companies. Fifty-seven
percent of entrepreneurs said that they were seeking early
stage funding and another 15% said they were seeking
startup/seed capital. Slightly more than a quarter have been
looking for funding for 6 to 12 months, and another quarter
said they had been seeking funding for 3 to 6 months.
VCs
and entrepreneurs both expressed concern about the dearth of
funding available for seed and early stage companies in the
region right now. Nearly
half of the VCs surveyed said that seed/early stage
investing is most lacking.
But, Kevin Burns points out, there is a big
difference between seed/startup and early stage. The threshold for
early stage institutional funding is $5 to $7 million. While
the majority of VCs surveyed indicated that they prefer to
invest in early stage companies, they are typically looking
to invest at higher levels than entrepreneurs are seeking. Most of the
entrepreneurs surveyed reported that they were seeking
between $1 and $3 million.
“The
definition of “Early Stage” has morphed over time. Today, early stage
means that you have a finished product, customers, revenue
and will be profitable by the end of the next round of
financing,” said one entrepreneur.
Why More
Money is Coming from Outside the Region
As a
result, entrepreneurs say that they are seeking funding from
firms outside the region. Indeed, data from the Venture
Economics and the National Venture Capital Association
indicate that in 2001 60% of the $1.9 billion in venture
investment in the region came from outside the region.
Forty-three percent of the entrepreneurs and 37% of the VCs
surveyed cited the difficulty finding lead investors in the
region as the reason the Mid-Atlantic is a net importer of
capital.
One
explanation for why it may be hard to find local lead
investors is that VCs are restructuring the way they are
evaluating and doing deals.
The majority of VCs (58%) report that they are
co-investing more today than they did in previous years. VCs are co-investing
to increase capital, minimize risk as well as to broaden
their experience to enable them to do more thorough, ongoing
analysis and due diligence.
“There
is safety in numbers. It’s
better to have more pockets and more minds around the
table,” noted one VC.
Said another, ”As an early stage firm, the largest
uncontrollable risk is financing risk. You need deep
pockets around the table to support good portfolio companies
traversing rough stretches in their development.”
But
entrepreneurs see this restructuring as risk aversion.
As
one entrepreneur put it, “The perception of entrepreneurs
is that local VCs are more risk averse than VCs in other
regions. Their
temperament sometimes seems more suited to banking than
venture investing.”
And
VCs too expressed some concerns.
“There
are too many people on the sidelines because no one seems to
have the next big idea,” said another VC. “And there still
doesn’t seem to be a consistent dialogue between
entrepreneurs and VC’s.
There seems to be a dialogue between VCs to VCs and
entrepreneurs to entrepreneurs. “
Conclusion
VCs
now believe that the worst is over. They’ve spent the
last 12 months working through their existing portfolio and
getting back to basics.
“After
the crash of the telecom and Internet sectors, we all
stepped back and restructured our firms so that we can do
what we’ve always done—build long-term, sustainable and
valuable companies,” notes Burton. “We’re ready to
start investing in new companies again, but this readiness
probably won’t translate into the capital availability
that entrepreneurs enjoyed in 1998, 1999 and early 2000.”
Methodology
The
surveys of venture capitalists and entrepreneurs are part of
MAVA’s ongoing efforts to better understand the climate
for private equity in the Mid-Atlantic. Both surveys were
conducted by email between February 11 and February 22. The venture capital
survey was sent to approximately 345 VCs throughout
Maryland, Virginia and the District of Columbia and received
an 18% response rate. The entrepreneur survey was sent to
652 entrepreneurs who participate in the Netpreneur Program
and received a 20% response rate. webSurveyor Inc.’s WebSurveyor
product was used for online portions of the survey.
MAVA represents
the collective interests and leverages the success of
venture capitalists investing in DC, Maryland and Virginia.
Founded in 1986, MAVA provides a wide range of programs,
information and forums designed to facilitate quality deal
flow, encourage collaboration, and foster solid
relationships with key service providers. Membership includes
375 venture capital professionals at 126 firms with over $10
Billion in capital under management. In addition, over 265
key service providers from the legal, financial, executive
search and consulting fields are also MAVA members. More
information at www.mava.org.
Netpreneur
is an entrepreneurial venture of the Morino Institute. Now
in its fifth year, the mission of Netpreneur is to advance
the success of New Economy entrepreneurs in the National
Capital region. Through a series of programs, events and
services, delivered online and offline, Netpreneur has been
a catalyst in the development of the entrepreneurial ecology
in the region by nurturing the creation of new businesses,
accelerating the growth of emerging businesses, and fueling
a critical mass of resources and activity around this
entrepreneurial core. More information is available at www.netpreneur.org.
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