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Potomac Tech Journal: VCs Expect More Deal Flow 


Elizabeth Wainger, MAVA
301.340.6831 or 301.254.1190
Mary MacPherson, Netpreneur

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. “

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.”

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

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


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