Startup investments, exits and hiring expected to improve in 2014, VC survey says

Venture capitalists and CEOs of companies backed by venture capital dollars are optimistic for the startup environment in 2014, a year they expect will see more initial public stock offerings, more hiring and better returns for investors.

Those findings come from this year’s Venture View survey, the eighth annual survey conducted by the National Venture Capital Association and Dow Jones VentureSource. But that optimism is tempered overall skepticism about the ability of the federal government to pass laws addressing issues important to the startup and investment community.

The survey results making 2014 predictions come as 2013 fundraising data is emerging. The Triago Quarterly this week reported that global annual fundraising, including venture capital, was up 35 percent to $365 billion in 2013. It’s the largest sum raised since 2008, according to Triago.

Nearly 300 venture capitalists and CEOs of VC-backed companies in the United States participated in the NVCA/Dow Jones survey, which was conducted between Nov. 26 and Dec. 11. Survey highlights follow.

Investing

According to survey results, 59 percent of venture capitalists and 57 percent of CEOs expect higher levels of overall investment in 2014. Expectations from both are higher than the survey responses last year, when 27 percent of VCs and 43 percent of CEOs thought investment would be higher.

As for the sectors that will attract investment, 73 percent of VC respondents said business IT would see increased investment, followed by consumer IT at 58 percent and health IT at 57 percent.
But VCs also expect declines in certain sectors: 62 percent predict decreases in clean technology investment; 46 percent see fewer dollars going into medical devices; and 31 percent declines in biopharmaceutical investment.

Consistent with last year’s survey results consumer IT was most often predicted as ripe for overfunding in 2014, cited by 53 percent of all VC respondents. Medical devices was the sector predicted as most underfunded, cited by 39 percent of VCs.

From a global investment perspective, expect more VC dollars to go to Latin America, a region cited by 50 percent of VC respondents as an area of increasing U.S. investment in the coming year. Africa, China and Western Europe were each cited by 26 percent of respondents. India, which last year was predicted to see an increase in U.S. venture dollars for 2013, is now expected by 40 percent of respondents to see a decrease in investment. As for China, 32 percent of VC respondents say fewer investment dollars will be made in that country.

Expect companies to do more work around the world. A total of 70 percent of CEO survey respondents indicated they would increase their global activity. None of the respondents said they would pull back globally; 16 percent they don’t have global operations; and 14 percent said they will maintain current global activity levels.

Companies also expect to raise more money. An overwhelming majority of CEO respondents — 69 percent — said they planned to raise additional funds in 2014 and 31 percent of them believe it will be easier to raise money in 2014 compared to 2013. The survey said that 55 percent of CEOs believe ease of raising funds next year will be the same as 2013; 38 percent indicated they thought it will be more difficult.

Exit activity

CEOs and VCs are nearly in agreement in their optimism about the exit market with 50 percent of CEOs and 49 percent of VCs expecting 2014 IPO volume to increase. But only 26 percent of CEOs and 25 percent of VCs predict that IPO quality will improve. By industry, 64 percent of VCs expect more tech IPOs, 43 percent expect fewer life sciences IPOs and 53 percent think there will be fewer clean tech offerings.

CEOs and VCs are also in agreement about acquisitions in 2014 with approximately 70 percent of respondents in both groups expecting greater acquisition volume in 2014. Most of that volume is expected to be in technology, cited by 70 percent of CEOs and 74 percent of VCs.

Much of this volume will be driven by technology acquisitions, with 70 percent of CEOs and 74 percent of VCs expecting more transactions within this sector. Regarding the quality of acquisitions, 36 percent of CEOs and 51 percent of VCs expect an improvement in 2014.

When asked to select all possible outcomes for their companies in 2014, 49 percent of CEOs chose acquisition, 41 percent predict no change, 23 percent say a private-to-private sale is possible, and 12 percent report an IPO could occur.

Venture capital fundraising, returns

Venture capital firms expect to continue to be challenged to raise funds in 2014 with 45 percent of VC respondents expecting the market to concentrate – more dollars raised by fewer funds. The prediction is consistent with the trend of fewer venture capital firms raising the bulk of the capital industrywide.

That contrasts with the prediction of 35 percent of VCs who believe the market will expand with more dollars raised by more funds, a significant increase over the 9 percent of VCs who made that
prediction for 2013.

A majority of VCs, at 75 percent, and CEOs, at 64 percent, do not plan to take advantage of new rules allowing for general solicitation and crowd funding in 2014. But 28 percent of CEOs and 17 percent of VCs say they will consider it.

A total of 75 percent of VC respondents expect to see improved returns in 2014. Additionally, 62 percent of VCs predict higher company valuations and 25 percent believe valuations will stay the same. The entrepreneurs are more optimistic with 84 percent of CEOs predicting increased valuations for their companies next year; 11 percent expect valuation levels to remain the same and just 5 percent expect a decrease.

Outlook for hiring, the economy

Headcounts at VC-backed companies are expected to grow: 87 percent of CEO survey respondents expect to add workers in 2014. But 19 percent predict hiring will be difficult next year due to a low supply of talent and 18 percent say a lack of qualified candidates will cause hiring challenges.

There’s also more economic optimism with 63 percent of CEOs and 61 percent of VCs expecting the U.S. economy to improve next year compared to just 49 percent of CEOs and 42 percent of VCs predicted economic improvements in 2013.

When asked to select one region other than Silicon Valley, New York and New England that is poised for growth in 2014, 18 percent of VCs chose Southern California; 17 percent picked the Southwest and Mid-Atlantic; 15 percent selected the Northwest; and the Midwest and Southeast were both picked by 13 percent of respondents.

CEOs differed in their selections with 20 percent picking the Midwest, 18 percent Southern California, 16 percent the Southwest, and 14 percent the Southeast.But the economic optimism drops when it comes to public policy. The majority of CEOs give little chance for for comprehensive tax reform or federal budget overhaul legislation; 51 percent predict little chance that immigration reform will pass. VCs are slightly more optimistic about a federal budget overhaul, with 42 percent giving it a minimal chance of passage.