Venture capitalists trnds for 2008

Venture capitalists are forecasting an active year for the industry with high growth in the CleanTech sector, an improving IPO market and fewer venture firms in 2008. These predictions are among the top line findings of the NVCA 2008 Predictions Survey. The results also show concerns about global investments in certain regions including China. Additionally, the industry believes fund sizes will become larger and returns for limited partners of venture capital funds will improve in both the short and long term horizons.

"For venture capital firms, 2008 will be the year we begin to see larger funds raised at a faster pace, as many firms in the industry will focus on sectors that have increasing capital requirements such as life sciences and clean technology," said Mark Heesen, president of the NVCA. "These sectors will not be exclusively U.S.-based, but have a world-wide platform which will require more time and more capital than ever before. That said, the other end of the spectrum -- seed and early stage investment and smaller, regionally focused firms -- will also be very active, particularly in the Internet and new media spaces. By its very nature, venture capital investment is long term so the ultimate winning strategy won't be clear for some time," Heesen added.

The NVCA survey was conducted in early December and includes the predictions of more than 170 venture capitalists from across the United States.

Investment Trends

Venture capitalists are predicting moderate investment growth next year with 71 percent of respondents pegging 2008 venture investment levels to be between $20-29 billion, with the average forecast at $27 billion, which would be on par with 2007 investment levels. A quarter of the respondents predict venture capital investment will be higher, in the $30-39 billion range.

Venture capitalists overwhelmingly predict (80 percent) that the CleanTech sector will attract higher levels of venture financing in 2008.

However, 61 percent of respondents also believe that the CleanTech sector will be overvalued next year. Other sectors of growth include media and entertainment (65 percent predict higher levels), biotech, and Internet specific companies (55 percent respectively). Investment in the medical devices and wireless telecom are expected to grow moderately with more than half the respondents predicting static or declining investment in these sectors. Fifty percent of venture capitalists predict a decline in semiconductor investing while 21 percent see declines in software. Accordingly, both industries are projected to be undervalued in 2008.

In terms of international investing, while there is a general assumption that global markets will continue attracting U.S. venture dollars, domestic venture capitalists are skeptical about quality deal opportunities in pockets of the world. Thirty-seven percent of respondents say they are leery about investing in South America while 28 percent are hesitant to invest money into China next year. Eastern Europe also causes concern for 17 percent of the venture capitalists surveyed.

Venture Capital Fundraising

Most respondents believe the industry will consolidate further in 2008 with 57 percent predicting the number of venture firms will decrease next year. Those that remain will be raising the same size or larger funds according to 84 percent of venture capitalists polled. Only 16 percent believe funds will be smaller next year.

Venture-Backed Exits -- IPOs and Acquisitions

While 59 percent of the venture capitalists are predicting further IPO market recovery, 44 percent see that recovery taking place at the same or a slower pace than 2007. Twenty-two percent see a flat IPO market and 19 percent believe the market will weaken for venture-backed companies.

Most venture capitalists still see the U.S. exchanges as holding the greatest promise for venture-backed company listings. Seventy percent cited NASDAQ as holding the most potential for venture-backed listings in 2008; 19 percent say AIM has most promise; followed by the Hong Kong (16 percent) and Shenzhen Exchanges (15 percent).

In the acquisitions market, the venture industry is split on how deal values will trend. Thirty-five percent say valuations will be higher; 27 percent say lower; and 38 percent say they will remain the same. However, the majority of respondents (55 percent) believe deal volume will increase.

Alternative Asset Performance

When asked about short term performance of other alternative asset classes, large majorities of respondents forecast a dip in returns. Venture capitalists overwhelmingly agree that short term performance will decline in the real estate (78 percent), buyout (70 percent), and hedge fund (73 percent) industries. However, most are optimistic about short term venture returns. Seventy-seven percent of venture capitalists believe their industry's short term performance will improve.

A significant number of survey participants predict declines in the long term performance of the buyout and hedge fund industries. Forty-three and 51 percent predict declines in these respective industries over the long term. However, forty-seven percent of the respondents say real estate long term returns will improve. Also, most venture capitalists are optimistic about the venture industry's long term performance with 80 percent predicting an improvement in the next 5 to 10 years.
Via-AVM