Venture capitalists in U.S. expect VC industry, funding to shrink

Note: The Skinny blog is written by Rick Smith, editor and co-founder of Local Tech Wire and business editor of WRAL.com.

RESEARCH TRIANGLE PARK, N.C. – Virtually every venture capitalist in the U.S. participating in a new survey believes the venture industry is going to shrink over the next five years.

They also expect the amount of venture capital available for investment to decline.

They are not alone in their pessimism.

Most VCs in France, Israel and the United Kingdom also forecast a drop.

The scariest news for entrepreneurs, however, may not be fewer VC firms but a decline in available capital for investment.

Among U.S. VCs in the survey, 57 percent predict a decline of up to 30 percent in funding and 15 percent expect the investment money falloff to exceed 30 percent. Only 18 percent expect more funds to be available.

In VC firm numbers, 24 percent expect a significant decline of more than 30 percent and 68 percent predict smaller numbers.

Fund raising is already in a miserable state, as reports from the NVCA/Thomson and Dow Jones reported over the past week. And the NVCA is fighting against tax changes in Congress that could radically change how VC firms are taxed. Mix in a continuing sour economy and the result is a diet of deadly news for VCs as well as startups seeking money.

So, it should be no surprise that the NVCA and Deloitte summed up funding sentiment as gloomy, too.

“The predicted amount of venture capital available for investment in the next five years followed similar trends by country.”

At least most U.S. VCs expect “deal flow” to remain strong and company valuations to remain stable overall.

Give Me a B, an I, a C …

However, the mood is vastly different among VCs in China, Brazil and India where most VCs expect growth.

Those are some of the more interesting finds in a survey released Wednesday by the National Venture Capital Association and Deloitte in their 2010 Global Venture Capital Survey.

Reasons for the pessimism or optimism vary – from the largely stagnant initial public offering exit route for venture-backed firms to what the NVCA and Deloitte describe as “unfavorable tax and regulatory policies” in the U.S. to China, India and Brazil emerging as leaders for innovation.

Here’s the breakdown on VC optimism/pessimism in terms of VC numbers:

• 92 percent of VCs in U.S. expect the number of VC firms to decline

• 83 percent of French VCs expect a decline

• 80 percent of Israeli VCs forecast a drop

• 70 percent of British VCs predict shrinkage

• 99 percent of Chinese VCs expect VC expansion

• 97 percent of VCs in Brazil forecast growth

• 85 percent of Indian VCs predict growth

The B, I and C in BRIC (Brazil, Russia, India, China) apparently are going to be the places where the bricks of a foundational for global entrepreneurship growth will be laid.

Mark Jensen, national managing partner for VC services at Deloitte, insisted in a statement that the U.S. and Europe “will continue to be important hubs despite consolidation in the number of venture firms.”
He also noted:
“However, the stage has now been set for emerging markets like China, India and Brazil to rise as drivers of innovation as they are increasingly becoming more competitive with the traditional markets.”

Mark Heesen, president of the NVCA, added: “It comes as no surprise that optimism abounds in geographies where venture investment is well supported by sound public policies, stable capital markets and entrepreneurial energy. Yet, it is ironic that the more optimistic environments are now outside the United States.”

So what’s wrong with the investment climate in the U.S.?

• 88 percent cite lack of “successful exits”

• 59 percent cite unfavorable tax policies

• 53 percent noted “unstable regulatory environment”

“The prevalence of these challenges represents a stark contrast to responses five years ago when the survey posed a similar line of questions,” the NVCA and Deloitte noted. “At that time, these factors were barely on the radar …”

The survey isn’t entirely negative for the U.S. and Europe, especially if startups are able to exploit overseas opportunities in economies where growth is occurring.

But beware protectionism when it comes to VC deals, not regular business.

VCs in Brazil, India and China are the least interesting in making investments outside their own countries at 19, 15 and 11 percent respectively.

Isn’t that interesting?

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Note: The Skinny blog is written by Rick Smith, editor and co-founder of Local Tech Wire and business editor of WRAL.com.

RESEARCH TRIANGLE PARK, N.C. – Virtually every venture capitalist in the U.S. participating in a new survey believes the venture industry is going to shrink over the next five years.