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VC industry remains optimistic despite ongoing challenges, says survey

Despite a decade of significant industry contraction and recent fundraising and liquidity challenges, many VC firms remain optimistic for 2013, according to the inaugural Venture Capital Outlook report from Rothstein Kass.

The survey of 117 VC firms titled “Venture Capital - Renewed Optimism: But Have We Turned the Corner” reveals that for the majority of firms the optimism is driven by the belief that the Jumpstart Our Business Startups (JOBS) Act will provide access to new capital and exit opportunities.

The survey is the latest initiative designed to provide insights and information to the financial services and alternative investment segments Rothstein Kass serves.

“While it’s true that venture capital has experienced significant contraction in the past decade, many of our contacts within the industry remain optimistic,” says Steve Menna, principal-in-charge of Rothstein Kass’ Dallas office. “This type of pruning could, in fact, be very healthy for the industry, improving deal flow and moderating valuations for the firms that remain standing.”

The survey reveals that the majority of firms believe the JOBS Act will create new funding opportunities. In fact, more than half of those polled (56 per cent) believe that crowd funding will become an increasingly important source of seed capital in the next two to three years. Despite their optimism, nearly half of the respondents (44 per cent) indicated that they will not alter their capital raising strategies in the wake of the JOBS act, while only 16 per cent indicated they will make changes.

“The JOBS Act has the potential to further benefit the venture capital industry, providing an environment in which access to capital is accelerated; for example, through crowd funding,” says Vincent Calcagno, principal-in-charge of Rothstein Kass’ Beverly Hills office. “This may set the stage for more early stage acquisition options down the road.”

While there are signs of optimism, the report reveals that some firms think it might get worse before it gets better. In fact the majority of those polled (60 per cent) expect exit opportunities will take even longer in the next 18 months than they did in the past 18 months. On the flip side, more than a third of respondents (39 per cent) believe there will be more IPO activity in the next 18 months and more than three-quarters of the firms polled (77 per cent) anticipate more merger and acquisition activity.

“The lack of exit opportunities for portfolio companies continues to weigh heavily on the venture capital industry,” says Jeff Somers, principal-in-charge of Rothstein Kass’ Boston office. “IPO activity continues to be anaemic, and, unless it is significantly boosted by either the JOBS Act provisions or economic recovery, IPOs will not provide significant amounts of liquidity going forward.”

The report also reveals that more than half of VC firms polled (54 per cent) plan to launch a new fund within the next 18 months. When approaching investors to raise capital for a new fund, the majority of firms polled (69 per cent) were most interested in achieving a favourable and strong management fee structure within the new fund. That goal is not surprising given that two-thirds of the VC firms polled (66 per cent) agree that there will be downward pressure on management fees going forward.

When it comes to funding, the survey reveals that high-net-worth individuals and family offices remain the most important sources of capital for VC firms, while nearly all respondents (91 per cent) expect seed stage funding from angel investors to either remain the same or increase over the next 18 months.

The majority of firms polled (54 per cent) believe there will be increased regulatory focus within the next five years. What’s more, the overwhelming majority of those polled (70 per cent) agree that their compliance costs will rise over that same time period. Nearly two-thirds of the VC firms polled (63 per cent) believe that outsourcing of non-investment functions will increase.

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