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 2005." 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 firms. "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 610-359-9609. 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