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Mid-Atlantic VCs report increase in forecasted financings, exits and investment diversification08/03/2006. Source: Mid-Atlantic Venture Capital Association. 
 Data released by the Mid-Atlantic Venture Association illustrates that term sheet competition is declining, and that VCs are experiencing new competition. Although venture capitalists invested at a moderate pace in Q3 2005, they expect their funding activity to increase, as well as the number of potential 'exits' or liquidity events from their current portfolio companies.
As VCs increased the time spent working with their current portfolio companies, they report diversification in their investment strategies. Additionally, although VCs reported a decline in term sheet competition, they did note that new sources of capital are entering the market and could offer competition to traditional venture capital financing. Views on the perceived competition of out-of-market venture capital funds investing in mid-Atlantic companies were divided.
'The landscape of venture capital investing in the mid-Atlantic region continues to evolve. While forecasted increases in new investments and exit opportunities are on the horizon, new players from the private equity asset class are emerging in the market,' said Julia Spicer, Executive Director of MAVA. 'Illustrating the vitality and breadth of the market, VCs are expanding their investment strategies in order to encompass varying stages and industry sectors.'
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 2005 survey was conducted via email and distributed to 477 member VCs using WebSurveyor, and received a 12.3% response rate.
Survey's Major Findings
Investment Activity Expected to Rise, Funds Spend More Time Working with Current Portfolio
In Q3 2005, VC respondents reported moderate investment activity with 67% participating in one or more investments, a slight increase over the previous quarter's (Q2 2005) results with 64% having participated in one or more investment. Investors expect funding activity to be stronger for the current quarter, Q4 2005 with 95% of respondents expecting to close one or more investments.
A majority of respondents consistently characterize valuations as 'slightly to considerably overvalued,' with 56% holding this view in Q3 2005 and 55% in the previous quarter of Q2 2005. However, 42% of respondents describe pre-money valuations this past quarter as 'on target,' which parallels the results in the previous quarter (Q2 2005) where 43% of respondents shared this opinion.
Compared to the same quarter two years ago, venture capital survey respondents reported an increase in the time spent growing and aiding their existing portfolio companies. In Q3 2003, 54.0% of VCs reported spending 40- 100% of their time working with their current investment portfolio. Two years later, in Q3 2005 the percentage has grown to 74% spending 40-100% of time assisting their current portfolio.
Regional Deal Flow Steady, VCs Assess Competition for Deals
Investors generally observed that the mid-Atlantic market has not recently seen significant variation in the volume of deal flow, with a majority of respondents (54%) indicating no visible change, up or down, in regional investment opportunities. Twenty-two percent (22%) of responding VCs characterized the state of deal flow as increasing slightly and 17% noted a slight decline in regional investment opportunities. For those VCs investing outside of the mid-Atlantic region, respondents this quarter identified their top geographic markets for investing as the Southeast (47%), New York/New Jersey (37%), New England (36%) and West Coast (29%).
A steady decline in term sheet competition has been recorded over the past year, with 24% of survey respondents perceiving that companies received competing term sheets 'routinely' in Q3 2005, as compared to 28% in Q2 2005 and 33% in Q1 2005. Furthermore, this quarter 15% of respondents believed that companies were 'rarely' receiving competing term sheets, versus 8% in Q2 2005 and 5% in Q1 2005.
Interestingly, respondents observe that when they are seeing term sheet competition, a relatively small fraction of term sheet competition is coming from out-of-market funds. Fifty-nine percent (59%) of respondents contend that less than 40% of the term sheet competition they are seeing is attributable to funds based outside the mid-Atlantic region.
When asked for their appraisal of out-of-market VCs presence in the mid- Atlantic region, views are split clearly down the middle. Forty-two (42%) percent of respondents report that competition from out-of-market funds is increasing, while an equal percentage, 42%, believe there is no visible change in competition from out-of-marketing funds. No one reported feeling that the competition from out-of-market funds was declining.
Investor Diversification Increases as New Sources of Capital Enter Market
While most investors continue to remain focused on their core areas of investment, more VCs this quarter appear to be expanding their scope, whether through diversification in company stage, geography or industry sector. Twenty-four percent (24%) of respondents claim to have been diversifying across company stage this quarter, versus 10% in the previous quarter, Q2 2005. Likewise, a slight increase in respondents expanding their geographic scope was recorded in Q3 2005 with 17%, as compared to 14% in Q2 2005. The percentage of respondents having entered new industry sectors has almost doubled this quarter with a rise to 15% from 8% in Q2 2005.
This quarter, survey respondents indicated a visible entry of new market participants in the traditional venture capital investment space, specifically pointing to hedge funds and large private equity players as the types of entities with an increasing presence. Forty-three percent (43%) of survey respondents said they are seeing new sources of capital outside of traditional venture capital entering the market to provide financing for their target or portfolio companies. As one survey respondent noted, 'Buy-out funds appear to be moving down market. This flow of capital can allow for some harvesting without the challenges of an IPO.'
Exit Activity to Increase, as M&A Activity Escalates
Projections for exit activity over the next year are relatively positive, with 71% of investor respondents estimating that 20-80% of their portfolio companies are well positioned for an exit over the next 12 months. Investors are more optimistic about exit activity than they were a year ago in Q3 2004 where 44% of respondents estimated that less than 20% of their portfolio would undergo a liquidity event during the course of a year.
The merger and acquisition (M&A) market in the mid-Atlantic continues to grow, with only 5% of respondents describing M&A activity as declining. A majority of respondents note an increase in regional M&A activity with 53% describing the current state of M&A in the region as 'increasing slightly' and 15% describing it as 'increasing significantly.'
MAVA represents private equity and venture capitalists with investment interests in the mid-Atlantic. Founded in 1986, MAVA provides a 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. For more information, please visit www.mava.org
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