US venture capitalists are forecasting a difficult 2009 for the country’s economy, the capital markets and the venture industry, according to a survey by the National Venture Capital As
US venture capitalists are forecasting a difficult 2009 for the country’s economy, the capital markets and the venture industry, according to a survey by the National Venture Capital Association.
Respondents to the survey believe the coming year will be met with a slowdown in investing across most sectors and a continued weakened exit market.
However, most venture capitalists surveyed predict a recovery in 2010 when the IPO market is expected to re-open and those companies and venture firms that weathered the storm will emerge strongly.
Mark Heesen, NVCA president, says: "2009 will be a year of anticipation for the venture capital industry as the economic turmoil will engender a fair amount of Darwinian change. The recession and shuttered IPO market will place tremendous pressure on portfolio companies to tighten their belts and re-tool where necessary. We will likely see a marked slowdown of new investments as venture capitalists turn their attention to supporting these existing companies. That said, most venture capitalists will say that a down market is the best time to invest when valuations and competition are lower. There is no recession on innovation and great ideas will still get funded – especially in sectors that have more insulated demand such as clean technology and life sciences."
Ninety-two percent of venture capitalists are predicting a slowing of venture investment in 2009, compared to 2008, which is expected to reach the USD29 to USD30bn range by year end.
Sixty-one percent of respondents believe the decline will be greater than ten per cent and fall below USD27bn in 2009.
However, more than half (53 per cent) predict that they will invest in the same or more portfolio companies in the coming year, suggesting overall lower dollar rounds.
Despite lower investment predictions across all industry sectors, clean technology is viewed by the highest percentage of respondents as potentially growing in 2009, with 48 per cent predicting increased investment and 20 per cent predicting unchanged investment.
The life sciences sector offered the second highest promise for investment stability and/or growth. Twenty-five percent of respondents believe biotechnology will increase and 33 per cent predict stable investment.
In the medical device sector, 24 per cent believe investing will increase while 38 per cent predict stable investment. The strongest consensus for investment decline is predicted for the semiconductor industry with 79 per cent expecting a decrease in investment.
Media/entertainment and wireless communications investing are also expected to decline with 71 and 60 per cent of all respondents predicting slowdowns in those sectors respectively.
Venture capitalists are predicting a slowdown in seed and early stage investment in 2009 with 60 and 64 per cent of respondents indicating declines in those company stages respectively.
Venture capitalists are also predicting a slowdown in global investment with more than half of the respondents expecting declines in every major foreign region. The outlook is particularly grim for Europe where 74 per cent of respondents believe there will be a decrease in venture investment. The outlook in other countries is split with 56 per cent predicting a decline in Israel and India and 51 per cent predicting declines in China.
Almost all venture capitalists (96 per cent) predict it will be harder for new companies to get funded in 2009. Additionally, 93 per cent of all venture capitalists believe that it will be harder to sustain existing portfolio companies in the coming year.
While 96 per cent of venture capitalists predict that more venture firms will not be able to raise money in 2009, a lower percentage, 85 per cent of respondents, believe institutional investors will reduce commitments to venture capital asset class.
"While many existing institutional investors are struggling with their allocations and future investment decisions, we will see new limited partners, many from overseas, enter the US venture capital industry,’ says Heesen. "Despite the fodder, we do not anticipate massive failures of limited partners to make capital calls. Many will sell their positions on the secondary market out of necessity. Yet, that will just change the mix and allow other institutional investors access to funds they could not access in prior cycles. High quality venture firms will be adequately funded going forward."
The majority of venture capitalists (72 per cent) do not expect the IPO market to re-open for portfolio companies until 2010 or beyond. A more optimistic 18 per cent see the market opening in the fourth quarter of 2009. While venture-backed acquisition volume is expected by 57 per cent of venture capitalists to remain the same or increase, 87 per cent of respondents predict that acquisition transaction value will decline.
Venture capitalists are equally pessimistic about the overall economy with 81 per cent predicting that the economy will remain the same or worsen in 2009. Only 15 per cent predict that the Dow Jones index will be above 10,000 in the coming year.
