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Mid-Atlantic VCs Close Out 2007 on a High Note20/02/2008. Source: The Mid-Atlantic Venture Association (MAVA).
 Investments were up and timeframes to close deals shortened in the fourth quarter, according to The Mid-Atlantic Venture Association (MAVA).
The Mid-Atlantic Venture Association (MAVA) today released its MAVA venture capital (VC) survey results for the fourth quarter of 2007, illustrating a positive close to the end of 2007 with high levels of investments, the timeframe for closing a new deal decreasing, and growing numbers of exits (liquidity events) forecasted in their portfolio companies. Additional signs of a positive investment environment, from an entrepreneurs perspective, include an increased desire to return to more early stage deals, growth in valuations, and increased interest in burgeoning investment sectors such as energy/alternative energy and health services. However, VCs felt that entrepreneurs were receiving fewer competitive offers for investments in their companies with term sheet competition decreasing slightly. Survey results also indicate mixed feelings about the strength of the merger and acquisition market with no clear consensus on its current state although this exit path is seen as the primary viable path to liquidity.
"The investment climate in the mid-Atlantic region -- from both the investor and entrepreneur's perspectives -- is as strong as ever with positive market indicators such as new investments, forecasted exits, and healthy valuations having increased," said Julia Spicer, Executive Director of MAVA. "Despite current uncertainty in the public markets, venture capitalists in the region are actively closing new investments, increasing time spent evaluating new deals, and seeking more early stage deals in a market where valuations are increasing."
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 investment 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 Q4 2007 survey was conducted via email and distributed to MAVA VC members using Vovici, and received a 10% response rate.
Survey's Major Findings
New Deals: Significant Growth, Regional Uptick
This quarter regional investors were more active than the previous quarter with 89% closing at least one new investment, compared to 64% in the previous quarter (Q3 2007) and 72% a year ago (Q4 2006). As expected in previous forecasts, investments in companies based in the mid-Atlantic region also saw an increase in Q4 2007 with 58% of VCs indicating that 60-100% of their quarterly investments were in regional companies. This figure is a 17% increase over the previous quarter's results of 41% in Q3 2007 but similar to that of a year ago when 57% of VCs invested in regional companies.
The forecast for new investments in the current quarter of Q1 2008 are expected to be smaller with 77% believing they will close at least one new investment.
Deal Flow Growing, Takes Less Time to Close a Deal
VCs reported an increase in the number of business plans received this quarter, per month. Firms receiving 100+ plans per month increased to 49% this quarter from 38% last quarter, In addition to receiving increased volume in business plans, VCs reported spending more time evaluating new deals, up slightly this quarter to 57% spending 40-100% of their time looking at new investments, as compared to 54% last quarter and 50% a year ago in Q4 2006.
A shortening timeframe for closing a new deal was reported this quarter with the longer time period of 7-9 months decreasing to 3% from 18% last quarter. The shorter time frames saw an expected corresponding uptick, illustrating the timeframe to close a new deal has shortened. Investments taking 1-3 months to close grew to 31% this quarter from 23% last quarter and the 4-6 month timeframe increased to 63% from 56%.
Energy and Health Services are Hot Sectors, Early Stage Deals Desired
Survey respondents again this quarter confirmed their interest in seeing more new deals in the software sector with 23% choosing this sector of interest, similar to last year's result of 22%. VCs showed an increased interest in energy/alternate energy and health services. This quarter 18% of VCs indicated a desire to make more investments in the energy/alternate energy sector as compared to 12% a year ago; 12% of VCs have interest in making an investment in the health services sector, as compared to 6% last year. As compared to a year ago, VCs showed decreasing interest in Internet-related companies, dropping to 6% this year from 12% last year.
More early stage deals are desired as compared to a year ago, with 31% more VCs saying they would like to increase their deal flow at the early stage, up to 66% this quarter from 35% a year ago. Interest in late stage deals also saw an increase, up to 35% from 10% a year ago. To account for the large margin of increases in the early and late stages, the corresponding down turn was seen in the buyout and expansion stages. Interest in buyout declined to 0% from 6% last year and expansion decreased to 6% from 19% a year ago.
Term Sheet Competition Slows, Valuations Inch Up
This quarter, survey results showed a slight decrease in term sheet competition indicating that entrepreneurs may not be receiving competitive investment offers from multiple venture capitalists as often as they have in the past. A slight increase was seen in survey respondents who said entrepreneurs were "rarely" receiving competitive term sheets, rising to 9% from 5% the previous quarter. A corresponding decline was recorded in those feeling that term sheet competition was "routinely" occurring, dropping from 28% last quarter to 20% this quarter.
Of the term sheet competition that is occurring, survey respondents showed very little change in the number of term sheets that are being extended to regional companies from out-of-region investors with 52% indicating that 40-100% of all term sheet is coming from VCs outside the region.
Valuations are still considered by VCs to be overvalued and/or increasing in value. The majority of VC survey respondents continue to state that company valuations are overvalued with 63% considering deals to be "slightly to considerably overvalued" this quarter, up 9% from last quarter's finding of 54% but consistent with 64% recorded a year ago in Q4 2006.
VCs Say More Exits on Horizon, Feelings about M&A Market Mixed
A healthy increase was noted this quarter in the forecasted number of overall exits (liquidity events) with VCs indicating that 40-100% of their current investments are expected to exit in the next twelve months, jumping to 14% this quarter from 5% last quarter. An overwhelming majority of respondents believe that their forecasted portfolio company exits will be via a merger or acquisition (M&A) with those predicting that 50-100% of their forecasted exits will be via M&A rising to 80% from 72% last quarter.
Although VCs feel that the most likely exit route for their companies over the next twelve months is via M&A, they appear to be evenly divided about their appraisal of the current state of the M&A market. This quarter a larger number of respondents felt that the overall M&A market is declining (29%). Nearly another third of the respondents (26%) felt there had been no visible change in the market this quarter and a remaining third (37%) feel that the market is increasing.
Fundraising: More Plan to Raise "Same Size" Funds
More VCs this quarter indicated that their next fund will be the same size as their current fund with 32% saying they would stick with the same size, up from 8% last quarter. A corresponding down turn was seen in those firms that plan to raise a larger sized fund with 39% recorded this quarter as compared to 65% last quarter. Consistent results were seen in those planning a smaller sized fund with 7% this quarter and 8% last quarter.
Echoing the survey findings above, this quarter's survey results also recorded a shift in the actual size of the projected new fund with a decrease in those raising $100-$149M funds, falling to 9% this quarter from 22% in Q3 2007 and a corresponding uptick was seen in the smaller sized funds with those raising under $100M growing to 22% this quarter from 11% in Q3 2007.
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 $90 billion 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, please visit www.mava.org.
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