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MAVA VC survey results28/03/2007. Source: Mid-Atlantic Venture Association (MAVA).
 US Mid-Atlantic VCs are reporting a continuation of an increased investing trend as deal flow hits high levels, says the Mid-Atlantic Venture Association. Valuations are up, term sheet competition is down.
The Mid-Atlantic Venture Association (MAVA) has released its Q3 2006 MAVA VC survey results, indicating that regional venture investors had an active investment quarter, continuing the trend over the last few quarters for an increased number of new investments. VCs further predict that the fourth quarter of this year will see additional growth in the number of deals closing.
Results also illustrate that respondents report the quality and quantity of deal flow to be at the highest level in two years. Contrary to previous quarters' results, VCs are seeing less competition for term sheets; however the majority of respondents continue to characterize valuations as overvalued. VCs report mixed feelings about the growing trend of hedge fund investing in VC-backed companies. More VC firms plan to begin raising a new fund in 2007 than had been earlier predicted.
"Results from this quarter's survey validate the early market indicators often used to predict a healthy and vibrant investment climate such as increases in deals closed, deal flow and valuations," said Julia Spicer, Executive Director of MAVA. "Our investors continue to work diligently to achieve exits in their current portfolio companies and raise new funds while deploying capital for new investments."
The venture capital survey is part of MAVA's ongoing efforts to better assess the climate for private equity investing in the mid-Atlantic region. While the purpose of other private equity surveys is to track previous investment activity, the quarterly MAVA venture capital survey is intended to gauge investor attitudes, future activity and important investment trends. The Q3 2006 survey was conducted via email and distributed to member VCs using WebSurveyor, and received a 10% response rate.
Survey's Major Findings
Deals Increase, Growth in Forecast
Survey respondents reported that deal activity in Q3 2006 continued to be strong, as had been previously forecasted. Eighty-six (86%) percent of respondents reported participating in at least one deal in Q3 2006, in contrast to 74% in Q2 2006. Previous survey results for deal activity in the third quarter illustrate this quarter's strength, as compared to a year ago with 66% in Q3 2005 and two years ago with 82% in Q3 2004.
The outlook for investment activity in Q4 2006 calls for even further growth, with 97% of investors predicting participation in at least one new deal, the survey's highest-ever reported quarterly forecast. Of the deals forecasted for Q4 2006, 38% of respondents expect at least 60% to be in the mid-Atlantic region, illustrating stabilization in the number of regional deals as compared to the last several quarters, however consistent with results from the third quarter in previous years. In Q3 2005, 29% of VCs and in Q3 2004 38% of VCs forecasted 60-100% of deals would be in the mid- Atlantic.
When asked what geographies investors are seeking to participate in new deals, North Carolina's Research Triangle Park (RTP) region, New England and the Midwest saw the largest increases as compared to a year ago with a 15% increase in RTP deals (40%), 13% increase in New England deals (47%) and 13% increase in Midwest deals (20%). VCs indicated a continued interest to invest in West Coast deals with 37% of VCs saying they are interested in the region, an 8% increase over a year ago.
Deal Flow & Valuations Up, Term Sheet Competition Flat
This quarter the quantity and quality of deal flow-new investment opportunities sent to VCs for consideration-was reported to have increased to 51% this quarter from 29% in Q2 2006, the highest reported number since first asking the survey question in 2004.
Respondents indicated that valuations continue to increase with 69% this quarter characterizing them as "slightly-to-considerably overvalued", a 13% increase over a year ago. Conversely, respondents indicated that term sheet competition this quarter stabilized with 28.6% saying competition was "routine" and 57.1% indicating that it was "occasional", illustrating a return to more stable levels of reported term sheet competition consistent with results from the third quarter in previous years (responses came in at 24% as "routine" in Q3 2005 and with 22% being "routine" in Q3 2004).
Consistent with national reports, the majority of mid-Atlantic VCs have seen interest by hedge funds in VC-backed companies growing with 66% of respondents indicating an increased interest. Further, 60% of VCs view hedge fund participation with "mixed feelings" and only 11% believe the participation to be "generally positive," while 29% feel it is "generally negative".
The "quality of the management team" continues to reign as VCs top priority in putting money into a new investment, but this quarter "valuations not aligned with expectations" decreased in level of importance as a reason for rejecting an investment under consideration with a drop of 9% dipping from its #2 ranking last quarter to #4 this quarter.
VCs Spend Time on Fundraising & Exits
The time VCs spend looking at new deals remained stable this quarter in the face of increasing deal flow and flattening competition in term sheets. Survey results this quarter illustrate that VCs still aren't spending a majority of their time looking at new deals, with the percentage of VCs spending 60-100% of their time dedicated to new deals reported to be only 14% for the second consecutive quarter.
A large percentage of VCs are spending time focused on another important component of fund management, raising new funds or working with their portfolio companies to achieve exits. With more than a third of VC firms currently fundraising, more firms have indicated they will begin the fundraising process next year than had been earlier forecasted (34% in Q3 2006 vs. 21% in Q2 2006). This quarter, VCs indicated an increase in the number of firms raising a "larger sized fund" compared to the size of their last fund (71% in Q3 2006 vs. 63% in Q2 2006) with the largest increase at the $400M+ fund level (12% in Q3 2006 vs. 6% in Q2 2006).
Predictions for exits in fund portfolio companies was reported to be stable this quarter with the majority of respondents expecting those exits to be via merger or acquisition. A consistent percentage of respondents reported their forecast for 40-100% of their fund to exit in the next twelve months, with 15% this quarter as compared to 16% in Q2 2006. However, this quarter's percentage is a slight increase year-over-year with only 10% in Q3 2005 predicting that 40-100% of companies were expected to exit over next 12 months. Of those exits expected to happen in the next twelve months, VCs reported the majority to be via a merger or acquisition with 86% saying that 50-100% of their firm's exits would be via a merger or acquisition. This percentage is relatively flat from last quarter's figure of 84%.
Also to note in this quarter's results, more than half of respondents felt that they don't foresee visible change in exit activity (57% in Q3 2006 vs. 48% in Q2 2006), but there was a slight increase in those that felt "exit activity should weaken slightly" (11% in Q3 2006 vs. 5% Q2 2006).
MAVA represents private equity and venture capitalists with investment interests in the mid-Atlantic. Founded in 1986, MAVA provides a wide range of programs, information and forums designed to facilitate quality deal flow, encourage collaboration, and foster relationships with entrepreneurs and investors in order to promote private equity investment. Membership includes more than 500 venture capital professionals representing nearly 125 firms with collectively more than $10Billion in capital under management. In addition, more than 250 key professional service providers from the legal, financial, executive search and consulting fields are also MAVA members. For more information, visit www.mava.org
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