Venture Capital Forecast 2005

Keep your fingers crossed - 2005 could emerge to be a great year.

From my perspective, competition will heat up even further for later-stage companies that have made significant progress and are now seeking an additional round of financing. This trend will drive up valuations.

Start-ups should attract more attention too, but the venture capitalists will remain incredibly selective. For the most part, the days of funding just an idea are gone.

Also, the IPO and M&A markets should remain open and strong, which will help return capital to limited partners.

I asked several other venture capitalists to join me in making a prediction for 2005. The VCs below are either in the Southeast or invest in Southeast-based companies. Here are six other predictions. I appreciate their contributions.

Overall Venture Market to Continue Its Steady Recovery

"The venture capital market will continue its steady recovery in 2005. Exit markets, which returned in 2004, will continue their positive pace in 2005. The IPO window will remain open for much of the year for high growth companies with critical mass. The M&A market will also sustain its current healthy clip, particularly in software.

While venture firms will remain cautious, the activity level will rise in both numbers of deals and dollars deployed. A few new venture firms will emerge as leaders in the Southeast and Mid-Atlantic region, while a number of existing players will wind down their activities.

Venture returns to limited partners will continue to outpace public market returns over the long term by a significant premium."

-- Tom Roberts, Principal, Harbert Venture Partners, Richmond, Va.

More Favorable Valuations for Entrepreneurs

"Too much money will be chasing too few deals. The venture industry is raising more money than can be profitably deployed. Also, the $100 billion raised by the industry in 2000 needs to be invested by the end of 2005 or sent back to investors. These two things mean better prices for entrepreneurs and lower returns for undisciplined venture capitalists."

-- Mitch Mumma, General Partner, Intersouth Partners, Durham, N.C.

More Competition for Series B and C Rounds

"2005 should bring increased competition for follow-on financings.  In the IT sector, we're seeing customer spending increasing, sales cycles decreasing and exit environments improving. In addition, money is flowing into the venture industry - mainly into funds that target companies at the Series B or C stage.  A company that can gain some market traction and some meaningful revenue should find a very receptive capital market. We're already seeing this happen with our portfolio companies - the old four to six month time frame to raise a Series B or C round is shortening as companies are achieving real value-adding milestones. This is good news for entrepreneurs, because B and C round investors will need to move quickly and compete to get into the best deals."

-- John Glushik, Intersouth Partners, Durham, N.C.

Early Stage Money Will Start Flowing

"Venture funds typically have life cycles of five to seven years. New funds often put money in early stage companies at the beginning of their fund life cycle hoping for home run, while later in the fund life cycle VCs look for later stage deals to help get faster returns on their investments. The difficulty of raising funds over the last few years and a challenging IPO market has had many venture capital firms focused on getting their existing portfolio companies to exits or investing in later stage companies that have a better chance of success and a more defined exit strategy.

2005 will be an interesting rebound year for venture capital firms and early stage companies. Half of all venture capital firms are currently fund raising. New LPs appear to have an interest in alternative investments and it seems like the funds that have a good track record versus their peers should not have problems raising money.  2004 closed with venture capital firms raising around $18 billion, a 71 percent increase over 2003. In late 2005, the funds flush with cash will be actively seeking to put the money to work and early stage entrepreneurs will once again have several investors looking at them as potential home runs for their new portfolios.

Will it be the boom days again? No, but it will most likely return to the mid 1990's levels of investing...which is a good thing for entrepreneurs who have likened the last few years to the ice age."

-- Rik Vandevenne, Associate, River Cities Capital Funds, Raleigh, N.C.

Capital to Start Gushing Back to Communications Start-Ups

"I'll go out on a limb and suggest that with another year past and a few more exits in the telecom equipment sector, that the pain and suffering caused by the nuclear winter of 2002 and 2003 will fade into distant memory, and early stage money will start gushing back in to fund communications start-ups."

-- Tom Smith, Partner, Mid-Atlantic Venture Funds, Reston, Va.

2005 Becomes Year of the Cell Phone

"My prediction is that 2005 will be the year that cell phones genuinely start to become more and more general-purpose computer/communications platforms (smart phones). More and more business travelers will stop carrying their laptops on business trips and the world of cell phone software applications will begin a long cycle of increasing development."

-- Tom Scholl, Partner, Novak Biddle Venture Partners, Bethesda, Md.

Comments

[Steve Shu]

Nice collection of quotes (esp. since I'm a Texan now). The IPO market is not quite open yet from my perspective, but it is nice seeing the funnel starting to open up at both ends - competition in Series B & C rounds as VCs try to move more money is nicer environment than we've seen in the past. Once there is increased flow into early-stage deals, and more signs of liquidity, perhaps there will be increased angel money flow as well (since these folks have not had a favorable time looking at the hard follow-on financing climate).