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
"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 firstname.lastname@example.org 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 http://www.nvca.org .
SOURCE National Venture Capital Association