Venture Capital Competition to Heat Up in 2005

NVCA President Heesen Predicts New Business Cycle Will Fuel a Dynamic Year As

Firms Choose Investment Strategies

Dec 14, 2004, 00:00 ET from National Venture Capital Association

    WASHINGTON, Dec. 14 /PRNewswire/ -- The beginning of a new business cycle
 and a high demand for participation in the venture capital asset class will
 foster a strong competitive environment among VCs and limited partners alike
 in 2005, the National Venture Capital Association (NVCA) predicted today.
 According to Mark Heesen, NVCA President, the year will be characterized by a
 return to early stage investing as new funds are raised and those dollars
 begin to be deployed.
     "We will enter a new business cycle in 2005 when many venture capitalists
 will have fresh funds to invest and that has several implications for the
 asset class," said Heesen.  "At this time in a new fund's life, there isn't
 the pressure for immediate exits.  Thus, venture capitalists have the
 opportunity to search for those seed, startup, and early stage companies that
 have the potential to truly change the way we live and work in the next decade
 -- the future FedExes, Intels and Genentechs."
     The shift to earlier stage investing also means a return to "stealth mode"
 as venture capitalists look to capitalize on first-to-market advantages for
 their companies.
     "There will be some very exciting investments in highly innovative spaces
 in 2005 -- ones that will make a permanent impact on the US economy," said Jim
 Breyer, Managing General Partner of Accel Partners and NVCA Chairman.  "Yet
 some of the most compelling new companies may be the ones you don't hear about
 for some time."
     Despite a healthy market, the bar remains high for companies looking for
 venture investment.  Venture capitalists will be searching for true
 breakthrough innovations and will be avoiding "me-too" deals.
     "Value creation will be paramount in company formation," added Tracy
 Lefteroff, global managing partner of the venture capital practice of
 PricewaterhouseCoopers. "Good ideas will not be good enough as competition for
 funding remains fierce. Gone are the days when ethereal ideas got seed money,
 just to flesh them out.  In 2005, even start-up companies had better have some
 meat on their bones if they are to attract venture capital."
     Competition will not be limited to the investment side of the venture
 capital equation.  Fundraising will continue in earnest in 2005 as a high
 demand for participation in the asset class persists. Due to the smaller size
 of funds raised, limited partners will compete strongly for spots in the best
 performing funds.  First time funds raised by industry veterans are also
 poised to do well.
     "The NVCA will continue to caution the industry against raising more money
 than can be invested successfully," warned Heesen. "Many funds will be faced
 with the prospect of being oversubscribed; discipline will be critical in
     One area that is in question is the future structure of the limited
 partner investment base as the industry considers the challenges of accepting
 public pension money in wake of recent disclosure rulings.
     "2005 will be the defining year for the venture capital industry's
 relationship with public-entity investors," said Joe Aragona, General Partner
 at Austin Ventures and NVCA Chairman Elect.  "All parties must find a workable
 balance between the public's need for investment accountability and the
 confidentiality required to succeed in nurturing the next generation of our
 economy's leading companies.  Self-elimination from the asset class by
 overzealous, unnecessary information disclosure policies will have significant
 public policy and economic consequences for those limited partners who fail to
 acknowledge the requisite level of confidentiality for their general partners
 to be successful with their portfolios."
     Technology will continue to be the cornerstone of venture capital
 investing in 2005 with an ongoing focus in software and the life sciences
 sectors.  Emerging areas such as stem cell research and nanotechnology will
 continue to be watched closely by the venture capital industry, although
 investment in these companies will be limited until more basic research and
 development is completed. However, new promising areas of investment include
 energy, clean technology, and financial services.
     The exit markets will continue to improve in 2005 despite a questionable
 economy and Sarbanes-Oxley issues.  Much of the improvement will be attributed
 to IT companies, which comprise 60% of all venture investment, gaining
 traction this year.  Additionally, 2005 will begin to see more "phoenixes"
 rise from the ashes of the dot-com crash as strong, viable organizations ready
 for public investment.
     "Many venture capitalists and entrepreneurs will be vindicated in 2005 as
 their companies that were funded in 1999 survived the "nuclear winter" and are
 now ready to go public or be acquired," said John S. Taylor, vice president of
 research for the NVCA.  "These organizations and others will help drive higher
 cash distributions back to limited partners and ultimately contribute to
 improving returns for the industry."
     "If the last few months are any indication, 2005 should be an encouraging
 year as the IPO and M&A markets continue to open the door for venture
 capitalists to exit out of their portfolio companies profitably.  The
 combination of a growing economy, accelerating earnings growth and rising
 equity prices is making for a ripe exit environment.", said Sandra Ribeiro,
 Research Director of Thomson Venture Economics.  "The focus on later stage
 financing in companies in the past few years has allowed a pool of companies
 with strong financial statements to become eligible for exit opportunities".
     As the industry has stabilized, venture capital firms will be considering
 their own strategies for the coming decade.  Structurally, the decline in the
 number of firms will not be as precipitous as some had suggested.  Rather, in
 2005, the NVCA predicts the industry will begin to bifurcate into two types of
     "We will continue to see the large, global, cross-industry firms at one
 end of the spectrum with smaller, highly-focused firms that concentrate on a
 particular region or industry at the other,"  said Heesen.  "There will be
 successes clustered at both ends with those in the middle needing to compete
 aggressively for the best deals."
     NVCA members see 2005 as a year of opportunity in many areas.  For an
 exclusive list of the coming year's predictions from the country's leading
 venture capitalists, please contact Emily Mendell at or call
     The National Venture Capital Association (NVCA) represents approximately
 450 venture capital and private equity firms. NVCA's mission is to foster
 greater understanding of the importance of venture capital to the U.S.
 economy, and support entrepreneurial activity and innovation.  According to a
 2004 Global Insight study, venture-backed companies accounted for 10.1 million
 jobs and $1.8 trillion in revenue in the U.S. in 2003. The NVCA represents the
 public policy interests of the venture capital community, strives to maintain
 high professional standards, provides reliable industry data, sponsors
 professional development, and facilitates interaction among its members. For
 more information about the NVCA, please visit .

SOURCE National Venture Capital Association