Venture looks for alternatives(2)

The mood among US venture capitalists for 2007 is all about alternatives, according to a new predictions survey released this week by the National Venture Capital Association. VCs are looking not only at new technologies providing alternatives in energy and media, but they will also be looking for new exit strategies as they continue to see a lackluster IPO environment.

The survey, conducted in early December with over 200 venture capitalists across the US, shows that respondents are divided over whether 2007 will bring more impressive IPOs, but most agree that new exit strategies were going to have to be a focus in the next year. 47 percent of the VCs surveyed predict that the US IPO market will remain sluggish, while 50 percent expect to see signs of recovery in 2007. Only three percent expect a strong IPO recovery next year. By a wide margin VCs expect M&As to pick up the slack from lackluster IPOs. More than three-quarters of respondents say M&A deals will be the exit of choice, and only 22 percent predict a decrease from 2006 levels.

Interestingly, 71 percent of the survey respondents believe that selling portfolio companies to private equity firms will become a more attractive option in 2007. This bodes well for private equity firms as they eye the growing sectors that have been targeted by VCs.

Gerry Langeler, OVP Venture

“PE firms are the new M&As, M&As are the new IPOs, IPOs are the new foreign markets,” noted survey participant Gerry Langeler, managing director for OVP Venture Partners.

Overall, the VCs surveyed expressed great optimism concerning the upcoming year. 69 percent of venture capitalists predicted investment levels between $20-$29 billion in 2007, with most respondents expressing confidence that the Rational Investment Performance-driven Equilibrium (RIPE) zone is sustainable. One-third of respondents predicted even higher levels of investment, $30-$39 billion. Much of the enthusiasm was directed toward new sectors that are providing alternatives to traditional models, such as energy and media. 91 percent of the VCs expect increases in the energy sector in 2007, and 70 percent predict increases in internet-specific companies. 69 percent predict increases in media and entertainment. Semiconductors and software saw much less enthusiasm from the respondents, with 9 percent and 23 percent, respectively, predicting growth.

Another major area of excitement for VCs is in the international arena. More than half of the VCs surveyed believe US venture-backed companies will be more likely to consider overseas IPOs next year. Additionally, the VCs said they expect more deal flow to be coming from overseas. 93 percent of respondents say they expect to see increases in investment in China, and 92 percent say they expect the same for India. VCs also expressed interest in Eastern Europe and other Asian countries. On the other end of the spectrum, 15 percent of respondents said they expect to see decreases in investment in Israel, and 13 percent said they expect to see decreases in Canada and Western Europe.

Jeffrey Bussgang, IDG Ventures

“With opportunities abroad abounding, many senior VCs are spending less time in the US and focusing their energies on developing outposts in China, India and Eastern Europe,” noted survey respondent Jeffrey Bussgang, general partner at IDG Ventures Boston. “This, along with the usual ‘call in rich’ VC retirement cycle, will result in a thinning of experienced, company-building GP talent on the home front.”

As VCs start to look at alternative exits, markets and technologies, the way venture capital operates in the US could be drastically altered.