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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 Netpreneur.org 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.”
Methodology
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
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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