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Most venture firms planning fewer investments, global survey says

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The global economic downturn is striking entrepreneurs where it really can hurt – venture capitalists are reducing their investment plans.

While 13 percent of VCs plan to invest in more companies, 51 percent plan to cut back, according to a survey of 700 VCs worldwide conducted by Deloitte Touche Tohmatsu and the National Venture Capital Association.

Most VCs also say the amount of investments by their firms will either decline or remain the same.

However, 45 percent or more of participants said the current climate for investing is “terrific” in their respective geographic regions.

Respondents included 44 percent from the U.S., 28 percent from Europe and 16 percent from Asia Pacific.

“In general, VCs are decreasing their overall investing dollars, focusing on their best companies and increasing their allocation to later-stage investments,” the authors of the study wrote.

VC’s focus also is less on the U.S., where only 17 percent of those surveyed expect investments in the U.S. to increase over the next three years. However, 50 percent expect more investment in Asia pacific outside of India, 43 percent see more funding in India, 36 percent expect more in South America and 25 percent see growth in Euope.

Best candidates for funding apparently will be in “cleantech,” the survey added.

The hottest sectors in terms of growth projections:

• Cleantech, 63%

• Medical device and equipment, 37 percent

• New media/social networking, 26 percent

• Biopharmaceuticals, 24 percent

• Consumer business, 24 percent

• Software, 22 percent

• Telecommunications, 15 percent

• Semiconductors, 6 percent


The report comes in light of recent reports, including the NVCA’s own annual yearbook, that shows the number of venture capitalists and VC firms is shrinking while the values of portfolio investments are plunging.

Most affected by the economy are larger VC firms, according to the survey.

“Lower valuations could present opportunities for VCs looking for a good deal,” the authors said. “But are they spending? In fact, we see the larger firms eying a bigger slowdown than the smaller firms. Just more than half of respondents from firms managing $500 million or more are decreasing their level of investment, compared to about one in three of those managing $99 million or less.”

The funds most likely to increase investment numbers (17 percent) and size (21 percent) were those managing between $50 million and $99 million.

An evolution of the VC business is coming with globalization playing a key role, said Mark Jensen, national managing director of Venture Capital Services at Deloitte.

“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,” he said. “In recent years, many entrepreneurs who have been educated in the United States 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.”

Mark Heesen, the NVCA’s president, said the survey indicates changes are coming in the industry, including VC investments outside of the U.S.

“The venture capital industry will evolve significantly in the next few years as the asset class responds to a Darwinian contraction resulting from the recession, the rise of innovative industry sectors such as clean technology and the continued interest in venture capital outside the United States,” Heesen said.

“As the survey results suggest, we will see more globalization in the next decade, not only in terms of investments but also in fundraising and exits as well. Those countries that can nurture
entrepreneurs and investors as well as offer attractive exit opportunities have the most to gain
economically in the next decade.”

The economic climate also is affecting the company starters, Heesen added.

“Young entrepreneurs who thought they could get rich quickly with just a good idea are now gone and those now left standing recognize the challenges and tenacity needed to establish and build a sustainable business,” he said. “Those out on the hustings trying to get funded are much more astute about the globalization of the economy and worldwide competition. They understand that the value of their company today is not what it will be six months from now and that if they want to be funded, it will likely be at a lower valuation than in the past.”

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