Wednesday, December 26, 2012

VCs and CEOs Predict Activity for 2013

Venture capitalists (VCs) and chief executive officers (CEOs) of venture-backed companies are keeping their exuberance for 2013 in check, offering specific areas of optimism for the coming year according to the 2013 Venture View predictions survey conducted by the National Venture Capital Association (NVCA) and Dow Jones VentureSource. The challenges of 2012 loomed large and are expected to continue to impact the venture capital ecosystem next year, but not without expected improvements in key areas including investment in information technology (IT), particularly on the business side, emerging markets such as Latin America, as well as startup company job growth. According to NVCA president Mark Heesen, the promise of the coming year is being stifled by economic and political realities:

“While anecdotally we have been hearing about ‘light at the end of the tunnel’ from venture capitalists and CEOs alike, this year’s survey reminds us that we are not out of the woods yet,” said Heesen. “Ongoing uncertainty surrounding the fiscal cliff clearly impacted respondents’ outlooks for the coming year. The influence the federal government has over the growth or stagnation of our industry has never been greater. Lawmakers need to understand that their brinkmanship politics is hurting the entrepreneurial ecosystem, which has been grasping for positive news for the last four years. The potential for growth is palpable, with positive forecasts for startup jobs, technology innovation, and global activity. But to realize this promise we must get on the right track in
Washington, and quickly.”

The seventh annual Venture View survey reflects predictions from more than 600 venture capital professionals and CEOs of venture-backed startup companies in the U.S. collected between November 26 and December 7, 2012.

Optimism Shifts Within Information Technology from Consumer to Business and Healthcare

Most venture capitalists predict investment increases in Business IT (61 percent of respondents), Healthcare IT (57 percent), and to a lesser extent Consumer IT (35 percent), the latter being the sector of greatest expectations last year. Most VCs see decreases in clean technology investment (61 percent of respondents), medical devices (53 percent) and biopharmaceuticals (49 percent). Consumer IT is most often predicted as ripe for overfunding in 2013 with 62 percent of all VC respondents citing the sector. Medical Devices is most often predicted as underfunded with 49 percent of VCs saying so.

With regard to venture investment overall, CEOs are far more bullish than VCs with 43 percent forecasting increases compared to 27 percent of VCs who expect levels to rise. These expectations are slightly lower than last year when 45 and 32 percent of CEOs and VCs thought levels would increase respectively.

CEOs Set to Raise Money in 2013 Despite Challenges

Despite predictions of fewer available VC dollars, 67 percent of the CEOs surveyed plan to raise additional funding in 2013. Forty-two percent of those believe it will be more difficult; 36 percent say it will be the same as 2012; and, 22 percent think it will be easier than last year to raise capital. According to 45 percent of the venture capitalists, the hardest funding round to obtain in 2013 will be Series A. Twenty-eight percent of the VCs cite Series B as the hardest round to raise followed by Seed / Angel funding at 13 percent. Regardless, 65 percent of VCs and 56 percent of CEOs believe terms will favor VCs in 2013. Only 14 percent of CEOs and six percent of VCs expect terms to be more favorable to entrepreneurs in the coming year.

Global Activity Will Increase for Startups; VCs Bullish on Latin America Latin America is cited by 55 percent of VCs as an area of increasing U.S. investment in 2013 followed by China (40 percent) and India (37 percent). Fifty-five percent of VCs predict there will be U.S. investment decreases in Western Europe, followed by Eastern Europe (36 percent) and Japan (30 percent).

On the company front, of the CEOs surveyed 66 percent are planning to increase their global activity with just two percent pulling back globally. Sixteen percent do not have global operations and 15 percent will maintain their current global activity levels.

More Optimism for Acquisitions Than IPOs Next Year

VCs are more optimistic than CEOs regarding the exit market. Forty percent of VC respondents expect 2013 total IPO volume to increase and 52 percent believe that IPO quality will improve. This compares to just 29 percent of CEOs who believe IPO volume will increase and 37 percent who see better overall quality ahead. While VCs expect fewer life sciences (42 percent) and clean tech (57 percent) IPOs, many see better quality IPOs in technology (50 percent), life sciences (39 percent), and clean tech (28 percent) in 2013.

VCs and CEOs agree that acquisitions will be more prevalent in 2013 with 62 percent of both respondent bases predicting volume increases next year. Much of this volume will be driven by technology acquisitions with 63 percent of CEOs and 60 percent of VCs expecting more transactions within this sector. Overall acquisition quality is expected to improve in 2013 by 35 percent of CEOs and 40 percent of VCs.

Half of the CEO respondents would consider being acquired in 2013 while seven percent would consider going public next year.

VC Market Will Contract and Concentrate

The fundraising environment will continue to be challenging for venture capitalists with 44 percent expecting the market to contract next year, with fewer new funds and fewer dollars raised. Another 42 percent believe the market will concentrate with more dollars raised by fewer funds. Only nine percent of VCs responding believe fundraising will expand (more dollars and more funds) and five percent believe the market will broaden with fewer dollars but more funds. Regardless of the amount of fundraising that occurs in 2013, 73 percent of VCs expect agreements to favor LPs in the coming year.

CEOs Forecast Higher Valuations; VCs Expect Better Returns in 2013

Venture capitalists are mixed on 2013 valuations with 38 percent expecting a decrease in their overall portfolio, 32 percent predicting an increase, and 30 percent forecasting that their portfolio valuations will remain unchanged. Still, 49 percent of VCs expect returns will improve next year, 34 percent see no change and just 16 percent think performance will decline in 2013. CEOs are far more optimistic with 78 percent predicting an increase in their company valuations, 14 percent forecasting no change and just 8 percent expecting a decline.

CEOs Expect Job and Corporate Spending Growth

Similar to last year, 83 percent of CEOs surveyed expect to increase headcount in 2013 and 46 percent feel this hiring is achievable based on supply and demand. Thirty-four percent predict hiring will be difficult next year due to strong demand for workers (18 percent) and low supply of talent (16 percent). Fifty-one percent of CEOs believe corporate technology spending will increase; 31 percent see it remaining the same; and only 18 percent predict a decrease in 2013.

Both VCs and CEOs Skeptical on U.S. Economic Growth and Political Progress Next Year

Forty-nine and 42 percent of CEOs and VCs respectively expect the U.S. economy to improve in 2013. This forecast is slightly more pessimistic than last year when 53 and 47 percent of CEOs and VCs predicted economic improvements. Regionally, 42 percent of VCs expect further improvements to the New York ecosystem followed by Silicon Valley (29 percent) and New England (28 percent). More CEOs see improvements in Silicon Valley (32 percent) followed by New York and New England (30 percent each). Other regions most often cited as having potential for growth next year by VCs include Southern California (20 percent), Mid Atlantic (17 percent), Midwest (17 percent) and the Southwest (15 percent.) CEOs cite the Midwest most often as having potential for growth (19 percent) followed by the Southwest (17 percent), Southern California (17 percent) and Mid Atlantic (15 percent).

VCs and CEOs Alike Predict Little Progress in Washington on Policy Issues

Of the major policy issues in Washington, the highest percentage of VCs (49 percent) think that a cyber security bill has a good to strong chance of passing, followed by immigration reform (47 percent), tax reform (40 percent), and a federal budget overhaul (33 percent). CEOs are slightly less optimistic with 45 percent citing a good to strong chance of a cyber security bill passing, 47 percent chance of immigration reform, 38 percent chance of a federal budget overhaul.

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