The global economic downturn has many venture capitalists altering strategies, including reducing investment levels in the short-term, according to a survey by Deloitte Touche Tohmatsu
The global economic downturn has many venture capitalists altering strategies, including reducing investment levels in the short-term, according to a survey by Deloitte Touche Tohmatsu and the National Venture Capital Association.
Fifty-one per cent of the survey respondents are decreasing the number of companies in which they plan to invest and just 13 per cent are increasing this activity.
The 2009 Global Venture Capital survey, which measured the opinions of more than 700 venture capitalists worldwide, also says the cleantech sector is poised to become the leading investment category and that the globalization of the venture capital industry will intensify, the latter posing significant competitive questions for the US and opportunities for emerging markets such as China.
"While the recession has slowed the pace of venture investing in the short term, it may very well have expedited the global evolution of the industry in the long run," says Mark Jensen, national managing partner of Deloitte’s venture capital services. "In recent years, many entrepreneurs who have been educated in the US have returned home to start companies in their home countries. The playing field continues to level out in terms of new innovation hot spots, broader access to capital and growing regional ecosystems that foster risk taking and capital formation."
While investment levels may decline, the majority of venture capitalists are not shifting their investment strategies in terms of the industries where they are putting their money to work. A majority of venture capitalists (79 per cent) anticipate stable levels of investment across all industry sectors with the exception of the clean technology sector where 63 percent of venture capitalists expect to increase their investments over the next three years. Advances in new technology, growing consumer demand in alternative energy and the ambitious plans of governments worldwide to invest in clean technologies have made this sector a key focus for the venture community.
The medical device sector ranked second in terms of growth potential with 37 per cent of the respondents anticipating increases in investment followed by new media (26 per cent), consumer business and biopharma (24 per cent) and software (22 per cent).
Venture capitalists are less optimistic about more mature sectors, such as the telecommunications and semiconductor industries, with just 15 and six per cent of venture capitalists surveyed planning to increase their investment in those sectors respectively.
The recession also has a core group of venture capitalists shifting their stage of development investment focus. Thirty-six per cent of the respondents surveyed intend to move toward later stage investing in order to support existing portfolio companies until the exit markets improve. Just six per cent intend to move toward early stage investing to take advantage of the longer runway for company growth.
Fifty-two percent of all venture capitalists surveyed in the 2009 study indicate that they are currently investing outside their home countries. Looking forward, venture capitalists believe that investment levels are more likely to increase in countries outside of the US in the next three years. According to the survey, 50 per cent of respondents believe that investment will increase in Asia (excluding India); 43 per cent in India; 36 per cent in South America; 25 per cent in Europe and the UK; and just 17 per cent in North America.
Venture capitalists are also predicting that the economic crisis will result in less willingness on the part of limited partners to invest in the venture capital asset class over the next three years. Most at risk to decrease their venture allocations according to venture capitalists are commercial banks (88 per cent), investment banks (87 per cent), insurance companies (65 per cent) and corporate operating funds (63 per cent). Fifty- four percent of the respondents believe that governments may see an increased appetite for venture funding followed by corporations and family offices (23 per cent) and fund of funds (22 per cent).
Over the long term, the majority of venture capitalists surveyed remain optimistic with just over half (51 per cent) believing that it is currently a terrific time to invest in promising entrepreneurial companies. Only six per cent believe that it is not a good time to make investments. Further, fund sizes will increase according to 45 per cent of the respondents who predict their next fund will be larger than the one they are currently investing. Only 19 per cent predict they will raise smaller funds.
