Venture Capital Predictions 2007: Big Bets on Alternatives, Internet & Media 

Venture capitalists are predicting a strong and stable investment climate in 2007 with strong bets on alternative exits, greater deal flow in China and India, and Internet/media poised for greater VC investments, according to a survey conducted by the National Venture Capital Association (NVCA). 

The NVCA survey was conducted in early December and includes the predictions of more than 200 venture capitalists from across the United States.

Venture Investment

The average total 2007 investment level prediction was $27.6 billion.

  • 69% of venture capitalists predicting investment levels between $20-29 billion in 2007
  • one-third of respondents project higher levels of investment ($30-$39 billion) for the coming year. 

Venture capitalists are also predicting greater deal flow activity overseas: China (93%) and India (92%). Other global regions where VCs are predicting increases are Eastern Europe (59 percent) and other Asian countries (61 percent). The areas where the most VCs are predicting investment declines include Israel (15 percent of respondents forecasted investment decline there), Canada (13 percent) and Western Europe (13 percent).

The momentum in energy investing is expected to continue to 2007: 91% of all VCs expecting increases in the sector next year.  Based on the survey, companies operating at the intersection of Internet and media are also poised for more VC investment. 

  • 70% of the VCs see increases in Internet specific companies; 
  • 69% see increases in media and entertainment investing. 
  • 23% predict growth in software VC investments
  • 9% predict growth in semiconductors and 

The survey found that most VCs expect to see increased competition from other alternative asset classes in 2007:

  • 62% saying the venture capital industry will more intensely compete with hedge funds for deals and 
  • 48% believing there will be more competition from buyout firms.

Venture Exits - IPOS and M&As

With regard to the public markets as a viable exit strategy, VCs are sharply divided: 

  • 47% of respondents predicting that the U.S. IPO market will remain sluggish 
  • 50% expecting to see signs of recovery in 2007. 
  • Only 3% expect a strong IPO recovery next year.

Mergers and acquisitions are predicted to deliver returns in 2007:

  • 78% saying M&A deals will be the exit of choice 
  • 22% forecasting a decrease of M&A deals from 2006 levels

Alternatives to the traditional VC exit routes are expected to be a prevalent factor in 2007. 

  • 57% believe there will be a greater propensity for U.S. venture-backed companies to consider overseas IPOs next year. 
  • 71% of the venture capitalists surveyed believe the purchase of portfolio companies by private equity firms will become a more attractive option in 2007.

Venture Fundraising

The survey found that there will be no shortage of investable capital over the next several years:

  • 79% of respondents predicting that venture firms will raise similar size or larger funds during the next fundraising cycle. 
  • 50% of the respondents predict fewer firms will be doing deals after the next fundraising cycle 
  • 48% forecast a decrease in the number of venture firms operating in the U.S.

While most VCs (58%) expect the time between funds raised to be consistent with historical norms at 3-4 years, 38% of the respondents believe that firms will go out faster, raising follow-on funds in less than three years from the last fund close.

More than 90% of the VC respondents indicated a shift in the demographics of future funds raised. When asked to describe the make-up of the next fund cycle: 

  • 47% of respondents predict there will be less brand name firms operating; 
  • 43% say the number of industry focused funds will increase; 
  • 42% predict an increase in emerging funds.

Venture Capital Performance

80% of respondents believe the venture capital asset class will continue to outperform the public markets in 2007.  Short-term (3-5 year) venture performance in 2007: 56% predicted improvement. 

Long-term (10-20 years) VC performance: 

  • 41% saying there will be no change, 
  • 32% predicting improved returns, 
  • 27% predicting a decline in long term performance. 

"Alternatives will drive venture capitalists in 2007," said Mark Heesen, president of the NVCA. "This industry has built itself on finding alternative approaches to existing infrastructure issues. The 2006 investment momentum in sectors in need of or receptive to such changes, including energy, Internet and media/entertainment, will accelerate next year. Additionally, if the venture-backed IPO market in the U.S. doesn't begin to open in 2007, the VC industry will begin to leverage alternative markets and buyers for their portfolio companies. An industry-wide shift toward these new exits has the potential to fundamentally transform the venture capital business model."

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