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Liz Wainger (MAVA)

Morino Institute

Surveys Reveal VCs View Current Economic State
More Dimly Than Entrepreneurs

(Vienna, VA, September 25, 2001) Venture capitalists see a gloomier economic picture for the future in the Mid-Atlantic region than do entrepreneurs, according to two new surveys released today by the Mid-Atlantic Venture Association (MAVA) and Morino Institute The results were presented at Venture Outlook, a quarterly event MAVA hosts to bring together entrepreneurs, venture capitalists and analysts to delve more deeply into the story behind quarterly investment numbers.

"In times of great uncertainty, venture capitalists tend to step back for a while, an attitude that has been reflected in the slowing pace of venture investments both here and nationally for the past few quarters," said Art Marks, President of MAVA. "The events of September 11 will likely exacerbate this trend. But venture capitalists are in the game for the long-term, looking to see returns, not next week, but in several years. While the private equity markets have been slow and will continue to be sluggish for some time, venture capitalists are still looking at deals and funding companies with good ideas, solid business models and experienced, savvy management teams," Marks said.

"The entrepreneurs in our region continue to be optimistic, but this optimism is now more tempered with realism," said Mary MacPherson, Executive Director of the Morino Institute Netpreneur program. "At the core of an entrepreneur is a strong belief in their business and their ability to build it. Couple that drive with a healthier respect for the fundamentals and a strong talent pool, and this region will be well positioned as the economy rebounds," she said.

Surveys' Key Findings

  • Is the Region Still Declining?
    Half of the venture capitalists surveyed said they believe that as of September 1, 2001, the region is flat but scraping the bottom in terms of the decline/recovery cycle of private equity, and 44% said they felt we are still declining. In contrast, only 21% of entrepreneurs felt that the region was still declining, and another 21% felt that the region was beginning to see an upswing. Few venture capitalists (seven percent) felt that the region was beginning to see an upswing. The majority (56%) of entrepreneurs agreed with the venture capitalists that the region is flat but scraping the bottom.

  • Is Now a Good Time to Start a Company?
    On whether now is a good time to start a company, venture capitalists were much more optimistic, with 73% saying it is a good time, compared to 64% of entrepreneurs. Almost a quarter of entrepreneurs felt that it is not a good time to start a company, while only 18% of venture capitalists shared that view. As one venture capitalist put it, "This is America, entrepreneurs don't wait out business cycles." In follow-up questions, venture capitalists noted that now is only a good time if you have a good idea for a sustainable business and are willing to seeing it through. One venture capitalist remarked, "This is where the real warriors come from and if you are prepared to realize your goals, you will be successful on some level no matter what."

  • Perspectives on When the IPO Market Will Come Back
    Venture capitalists' view of the region's future was more tempered than that of entrepreneurs. More than half (53%) of entrepreneurs surveyed said that they expected improvement in the IPO market in the latter half of 2002, while only 41% of the venture capitalists felt that the IPO market would come back in the latter part of 2002. More than a quarter of venture capitalists (27.5 %) felt that the IPO market would not rebound until the beginning of 2003, while fewer (less than 25%) entrepreneurs shared this view.

  • Deals are Getting Done But Not for Very Early-Stage Companies
    Almost half of VCs said they expect to do between three and four deals (new and portfolio companies) for the rest of the year, and 22% said they expect to do five or more. Slightly more than half said that they expect to do only one to two NEW deals, and a quarter said they expected to do three to four NEW deals. This finding is consistent with previous MAVA surveys, which show that VCs are still spending a great deal of time "triaging their existing portfolio companies."

    While 58% of responding entrepreneurs report that their companies need to close funding deals by the end of 2001, the majority of these companies say they have been seeking current funding rounds for three months or less. This suggests that given the fewer private equity deals currently being closed many early-stage companies may not be able to secure funding within their required time frame.

    Two-thirds of entrepreneurs reported seeking rounds of $3 million or less, with 24% saying they are seeking funding less than $1 million. Half of the VCs surveyed indicated that they anticipate investing between $1 million and $5 million in the latter half of 2001 in new companies not currently in their portfolios. Given that the majority of entrepreneurs are seeking funding often considered to be below the dollar amount typically considered by institutional VC funds and that seed/angel funding is less available in the region, many early stage companies may not raise required amounts of funding.

    As on entrepreneur respondent described it, " The current investment climates seems to have temporarily rearranged the food chain so that angels see 2nd round deals and have no further need to take on the risk of seed rounds. The market for seed capital is almost non-existent right now."

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  • Early Stage Companies are Seeking Funding Outside of the Mid-Atlantic Region
    More than half of responding entrepreneurs (56.4%) say that their companies raised at least half of their funding from investors outside of the Mid-Atlantic Region. This statistic reinforces the trend that investors in the region are focused on existing companies and that the market for early stage funding in the region has shrunk considerably in 2001. When asked what advice they would give to entrepreneurs right now, the consensus among the VCs is that entrepreneurs should get back to basics: 1) wait as long as possible to raise expensive equity-use personal funds, government grants and friends and family; 2) focus on getting the product right, 3) conserve cash; 4) achieve steady growth, even if less than meteoric; 5) get and keep customers; and finally 6) pick a funder who can help beyond providing capital.

  • Complexity of Bio Tech Makes It Tough Venture Investment
    The majority of venture capitalists surveyed (57%) felt that biotech is not the strongest industry sector for long-term investment by venture firms here in the region. The reasons for this skepticism regarding biotech is that investment in this sector so capital intensive, takes a very long time to see profitable returns, and few VCs in the region have the expertise with early-stage bio tech investing. However, a third of survey respondents felt biotech is a good investment for both the short-term and long-term and that the region, with Johns Hopkins and NIH, is well positioned to exploit new opportunities in this sector. One VC respondent noted that "if the [region's] percentage increases for biotech investment, I expect it will be more a function of a decline in overheated sectors, such as optical and communications, as opposed to an increase in biotech. "

  • Telecom Will Come Back After Period of Decline
    An overwhelming majority of Mid-Atlantic VCs (90%) felt that telecom is still a very strong investment sector for the region, although half of the survey respondents felt that for the near term, this sector will be sluggish because of current market conditions and over investment that has resulted in an oversupply of telecom companies. VCs believe the long-term future of telecom looks good in the Mid-Atlantic because of the strong base of talent here and the fact that demand for new services will grow.

  • Novice Entrepreneurs Need Not Apply
    When it comes to what venture capitalists are looking for in the ideal entrepreneur, 70% of VCs surveyed said that experience is most important, and nearly 80% said people more than technology or capital intensiveness is the most important factor in deciding which companies to fund. For many entrepreneurs starting their first company, the focus on experience is frustrating. " [VCs] are not venturesome enough to investigate new ideas and people they don't know," said one entrepreneur respondent.


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 September 4 and September 14. The venture capital survey was sent to approximately 300 VCs throughout Maryland, Virginia and the District of Columbia and received an 18% response rate. The entrepreneurial survey was sent to 425 entrepreneurs who participate in the Netpreneur program and received a 19% response.

Founded in 1986, The Mid-Atlantic Venture Association (MAVA) encourages the development and growth of business enterprise by creating a forum where providers of private equity, their service providers, and successful entrepreneurs can interact and promote strong deal flow in the Mid-Atlantic region. MAVA's members represent 65 percent of the venture capital firms in the Mid-Atlantic and have more than $10 billion under management.

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.

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