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Q3 2007 MAVA Venture Capital survey results
07/11/2007. Source:Mid-Atlantic Venture Association (MAVA).
 The Mid-Atlantic Venture Association has released its Q3 2007 MAVA Venture Capital survey results, indicating that regional investors were not as active during the third quarter as previously forecasted, as the timeframe for closing a new deal increases, valuations and term sheet competition shows strengthening in the market.
Specifically, an increase in term sheet competition from out-of-region VC firms was recorded this quarter. Growth is expected in the coming quarter with the number of new deals and a corresponding percentage of regional deals to increase to previous levels. Although a decrease was reported in the overall exit opportunities on the horizon, merger and acquisitions continued to be seen as the primary viable exit vehicle with VCs indicating increased activity in the merger and acquisition market. Some VC firms have accelerated their fundraising timelines with more raising larger sized funds in 2007 than had been earlier forecasted.
"Market indicators such as strong valuations, stable deal flow, and forecasted regional deal growth point to a healthy climate for venture investing in the mid-Atlantic region as fundraising timelines accelerate and sizes of their new funds grow," said Julia Spicer, Executive Director of MAVA. "Although regional investors were not as active this quarter as had been forecasted, the mid-Atlantic region itself posted impressive investment numbers, indicating that out-of-region venture firms were active investors in the region as evidenced with survey results illustrating increased term sheet competition from such firms."
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 Q3 2007 survey was conducted via email and distributed to MAVA VC members using Vovici, and received an 11% response rate.
Survey's Major Findings
Deal Activity: Below Forecast, Growth on Horizon
This quarter the number of closed deals fell below the forecasted numbers with only 54% closing at least one deal as compared to the estimate that called for 94% to participate in at least one funding. VCs forecast an increase in activity in the coming quarter with 92% closing at least one deal in Q4 2007. Consistent with results from prior surveys, the percentage of regional financings is expected to return to previous levels with 63% forecasting 40-100% of their Q4 2007 deals will be in the mid-Atlantic region, up slightly from 61% in the last two quarters and 55% a year ago.
When asked for the reasons for the fall-off in their actual number of deals closed this quarter compared to their original forecast, VC respondents' leading reason was the "viability of the investment shifting during the due diligence process" (28%). Following as the second reason was the "need to reserve additional follow-on capital elsewhere in portfolio precluded new investments" (15%).
Valuations & Time Spent Looking at New Deals Up
The majority of VC survey respondents continue to state that company valuations are overvalued with 54% considering deals to be "slightly to considerably overvalued" this quarter. Within the spectrum of valuations, the view of deals being "considerably overvalued" jumped from 6% the previous quarter, Q2 2007, to 10% this quarter, Q3 2007.
VCs reported spending slightly more time looking at new deals than in previous years, with 54% spending 40-100% of their time dedicated to reviewing new investment opportunities as compared with 43% in 2006 and 48% in 2005.
Deal Flow Stable, Takes More Time to Close a Deal
This quarter VCs reported receiving a consistent number of business plans, however there was an increase in the timeframe for closing a new deal as term sheet competition continues to be at healthy levels.
Although a slight decrease in the number of large volumes of business plans was recorded this quarter, with 38% receiving 100+ per month, as compared to 44% the previous quarter, survey results are relatively stable with prior results (Q1 2007, 30%; Q3 2006, 31%; Q3 2005, 30%).
As compared to a year ago, a slight up-tick in the average timeframe to close a new deal--from first view, through the due diligence process to funding--was recorded with a 9% increase experienced at the 7-9 month timeframe and a 3% increase at 9+ month timeframe, with a corresponding decrease of 13% at the shorter timeframe of 4-6 months.
Term sheet competition showed stable, healthy percentages again this quarter with 28% saying competition was "routine" and 60% indicating that it was "occasional," consistent with results from a year ago in Q3 2006 with 29% indicating "routine" and 57% indicating "occasional" competition. Of this quarter's term sheet competition, there was an 11% increase in term sheets extended by out-of-region VC firms with 54% saying that 40-100% of term sheets were from firms headquartered outside of the mid-Atlantic region as compared to Q2 2007 when 43% of term sheets were from VCs outside the region.
Exits: More M&A Transactions Expected
Predictions of exit potential over the next twelve months within VC survey respondents' own portfolio shrinks to 5% that believe more than 40% of their portfolio is prepared to exit, down from 10% last quarter (Q2 2007) and 15% a year ago (Q3 2007).
The majority of respondents believe an exit via a merger or acquisition (M&A) to be the most likely for their portfolio companies that are prepared to exit over the next twelve months. M&A predictions are a bit higher this quarter with 72% forecasting that 50-100% of their forecasted exits will be via an M&A transaction, up from 68% a quarter ago. This quarter more VCs felt that M&A activity within the region was increasing with 10% indicating M&A activity is "significantly increasing," up from 3% last quarter and 3% a year ago.
Fundraising: More Firms Accelerate Timeframe
More VC firms reported fundraising in 2007 than was earlier forecasted with 45% currently fundraising or to begin fundraising later in 2007, compared to 35% from the previous quarter's results. While it is possible a percentage of firms that had indicated in the previous quarter that they were currently fundraising in 2007 have already closed funds this quarter, a decrease of 10% was recorded in this quarter's survey in those firms predicting to fundraise in 2008, indicating an acceleration of overall fundraising timeframe into 2007.
As compared to previous survey results, a similar number of VCs desire to raise a larger sized fund as compared to their current fund, with the majority (65%) of respondents indicating they will raise a larger fund. The target size of the new funds are also similar to previous quarters' results with the exception of a small decrease in the number of firms raising $400M+ funds falling to 3% this quarter from 12% last quarter.
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 go to www.mava.org
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