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Elizabeth Wainger, MAVA
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Mary MacPherson, Netpreneur

Morino Institute

Surveys Show Mid-Atlantic Venture Capitalists’/Service Providers 
More Optimistic; Entrepreneurs More Pessimistic 
As Early Stage Investing Remains Tight

(December 11, 2001, Timonium Maryland)  -- Although still wrestling with an uncertain investment climate, venture capitalists and service providers are beginning to see a silver lining, while the optimism exhibited by entrepreneurs in previous quarters is waning, according to three surveys released by The Mid-Atlantic Venture Association (MAVA) and the Morino Institute Netpreneur Program.  The results were presented today at Venture Outlook, a quarterly event MAVA hosts to bring together entrepreneurs, venture capitalists and service providers to gain insight into the current investment environment and to delve more deeply into the quarterly venture investment numbers.

The surveys, which are the first the two organizations have conducted post-September 11, suggest that the recession and the sluggishness of the public markets continue to shape the climate for venture investment and that fallout from the terrorist attacks has had little negative effect on investment attitudes. 

“The increased level of optimism among venture capitalists and service providers in this most recent survey is a reflection of several things,” said Patrick J. Kerins, MAVA president-elect and General Partner at Grotech Capital.   “While the pace of venture investment will continue to be slow, the combination of seasoned entrepreneurial talent in the region, increased government spending on security and other technology, and the large amounts of dry powder available for investment bode well for the future. As venture capitalists move their focus from their existing portfolios, they will be ready to think about new deals in 2002 when we are likely to see an increase of new investment.”

“Entrepreneurs are by their very nature optimistic,” said Mary MacPherson, Executive Director of the Morino Program. “But the sharp reality of a more hostile economic climate has set in.  Fewer entrepreneurs believe that their businesses are venture-backable.  The back-to-the-basics trend that we've seen throughout 2001 is amplified with the events of 9/11 -- work harder to drive revenue, focus on high margin opportunities, cut expenses and preserve cash at all costs,” she said.

Surveys’ Major Findings

The Decline in the Region Has Slowed
Roughly half of venture capitalists, service providers and entrepreneurs surveyed believe that as of November 1 the region is flat but scraping the bottom, a finding consistent with MAVA’s previous survey conducted in early September. However, the number of venture capitalists who felt the region was still declining dropped from 44% in September to 28% in November, and 14% of venture capitalists now say that they feel the region is beginning to see an upswing compared to only 7% in September.  The service providers were even more optimistic with 20% saying the region was beginning to see an upswing and only 18% believing that the region is still declining.

Entrepreneurs, in contrast, expressed an increased pessimism.  In September, 21% of the entrepreneurs said that the region was beginning to see an upswing. However, in November, that number fell to almost 14% while the number of entrepreneurs who felt the region is still declining jumped to nearly 30% from 21% in September.

As one entrepreneur noted, “Everyone wants to be an optimist and say that it is a good time to start a company, but the reality depends on one's circumstances.  In this environment, it's silly to quit one's job to start a company if you don't already have committed funding or committed customers.”

For the Near-Term the Lion’s Share of Venture Funding Flows to Expansion Stage Companies
The majority of venture capitalists (77%) and service providers (74%) surveyed agreed that expansion stage companies will continue to receive the lion’s share of venture funding for the short-term, but that in time the early stage market will come back again. “The early stage retreat is a function of the lack of liquidity in the markets and the uncertainty that creates,” said one VC respondent.  “VC’s are averse to early stage risk right now,” said another. “This will not remain the case past next summer.  People will get back in the pool once it gets a little warmer.”

Entrepreneurs were once again more pessimistic about the early stage market with nearly 41% saying that they believed that the bulk of venture dollars will continue to flow to expansion stage companies for the short- and long-term, compared with 21% of VCs and 24% of service providers.

Early stage entrepreneurs expressed great frustration over their inability to get venture funding now and are taking a back-to-basics approach to building their companies.  One described it this way: “Our company has had four Series A term sheets and the company was painfully whipsawed each time. For now, we've closed the book on VCs and we're going to build the company the old-fashioned way: private placement and customer revenues.”

VCs Are Still Spending a High Percentage of Time Aiding the Existing Portfolio
Survey results indicate VC’s are still spending a high percentage of their time on their existing portfolio.  Almost half of the VCs (46%) said they are spending 60% to 100% of their time on their existing portfolio, which is consistent with the response of VCs in April, the last time this question was asked.  One encouraging sign is that the number of venture capitalists who reported spending between 80% and 100% of their time on their current portfolio declined slightly in November to 8.9% from 11.1% in April.  

Entrepreneurs Believe More Venture Money Is Coming from Outside the Region
The surveys present mixed results on whether there has been a dramatic increase in investment here from venture firms based outside the region.  Forty-five percent of the entrepreneurs surveyed reported that more than half of the total dollar amount raised in their most recent round of funding came from investors outside of the Mid-Atlantic region.  However, nearly 62% of the service providers reported that more than half of the venture deals they were involved in during 2001 were led by VCs headquartered in the Mid-Atlantic region.   The VCs also had mixed feelings with 53% saying they weren’t sure if more money was coming from outside the region.  A quarter of the VCs believe more outside investor money is flowing to the region and 21.4% disagreed. 

As to the benefits of more funding from outside investors, VCs and entrepreneurs again had mixed responses.  Of those VCs who felt that more money is coming into the region from outside investors, half felt it was a good sign and one-third thought it was a bad omen.

One VC respondent put it this way, “More outside investment signals that the region is universally recognized as a good investment.  Nothing but regional participants paints the region as being parochial—valuations and concepts are held as suspect.”  Another felt that more outside money is bad for VCs but good for the region.  “Ask Coach K how he feels when UCLA picks off the best HS point guard prospect in North Carolina,” the respondent remarked. [This means] that the region is getting known nationally and attracting a lot of top talent. More money will follow.”

According to entrepreneurs, the benefits of more venture investment from outside firms include job creation, increased visibility of the region as a technology center, increased competition among local investors and new’ smart money pouring into the region. However, the entrepreneurs also expressed concern that regional investors are failing to support the local start-ups and missing attractive investment opportunities in the region because of increased risk aversion.

“Established Mid-Atlantic VCs are now so big they behave like non-VC private equity firms,” said one entrepreneur.  “Smaller VCs are new and often too inexperienced or small to lead deals that aren't fashionable.”

Another entrepreneur remarked, “Technology is not a regional business so why should the financing be?”

Nearly 40% of service providers reported that finding a lead investor within the region is perceived to be a major challenge for entrepreneurs, while only 10% of entrepreneurs who secured funding outside region noted that the inability to find a local lead investor was the main reason they looked outside of the region.

Region’s Venture Investment Levels Will Remain Stable 2002
When asked about their expectations for venture investment levels for 2002 in Mid-Atlantic companies, the news was again mixed.  Slightly more than half of VC’s and 38% of service providers felt that the region would maintain 2001 investment levels of about $2 billion. A quarter of service providers and 13% of VCs thought that the region would see increased levels of investment in 2002 of  $3 to 4 billion.  However, nearly 30% of both groups felt that in 2002 the region would retreat to 1997/1998 investment levels of $1 billion.

“The results tell us that some VCs and service providers remain uncertain about the future, while others are more positive,” said Gene Riechers, General Partner of consulting firm Broadreach Partners and a MAVA board member. “When the public markets stage their inevitable but unpredictable comeback, the rate of venture investment will further accelerate.”

The surveys of venture capitalists, service providers and entrepreneurs are part of MAVA’s ongoing efforts to better understand the climate for private equity in the Mid-Atlantic.  All three surveys were conducted by email between November 8 and November 27.  The venture capital survey was sent to approximately 300 VCs throughout Maryland, Virginia and the District of Columbia and received a 20% response rate.  The service provider survey was sent to 225 lawyers, accountants, and investment bankers in the region and received a 24% response rate. The entrepreneur survey was sent to 301 entrepreneurs who participate in the Netpreneur Program and received an 18% response rate.

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 provider.  Membership includes 375 venture capital professionals at 127 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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