Venture Capital Picture Brightens

June 11, 2004
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FOUNTAIN HILLS, ARIZ.  — The venture capital environment in nearly half the states looks brighter for 2004 — and Michigan is one of those states.

According to an annual national survey of 75 venture capital companies, entrepreneurs in Michigan should polish up their PowerPoint presentations and practice their pitches, because venture capital purse strings are loosening up.

The study — conducted by Dee Power and Brian Hill, of Profit Dynamics Inc. in Fountain Hills, Ariz. — reports that investors intend to invest more in 2004 than they did in 2003.

The surveyors reported that in 2003, the strong rebound of the public equity markets seemed to set the stage for improvement in the venture capital industry.

At the time of last year’s survey, however, the VCs remained somewhat cautious about the future, given that many still had to deal with ailing companies in their portfolios.

“Now these problems seemed to be resolved,” Power and Hill wrote, “and venture capital firms are stepping up their investment opportunities accordingly.  The more robust IPO market and increased M&A activity are allowing VC firms to exit earlier investments and raise cash for new ones.”

To sum up, in 2002, VCs thought the worst might be over for them, after an extremely difficult period in 2000-2001. “In 2003 we saw their outlook turn positive, and now there is true reason for optimism if you are an entrepreneur: Seven out of 10 VC firms intend to invest more in the next 12 months.”

While 70 percent of the venture capital firms surveyed indicated they plan on investing more in 2004 then in 2003, only 6 percent reported they planned to invest less this year than last. Power and Hill advised that several of those respondents, however, qualified their answers by saying that they were at the end of a fund cycle.

The overall investment likeliness rating was 3.7 — an answer of 1 indicating “much less” and 5 indicating “much more.”

In addition to Michigan, other Midwestern states in which Power and Hill said their survey found venture capitalists venturing forth were Illinois, Indiana and Ohio.

The survey found that 84 percent of the venture capitalists they contacted thought the environment for entrepreneurs looking for early stage capital would be better this year than last.

In 2003, by contrast, only 30 percent of the venture capitalists thought the future would be an improvement.

Power and Hill said they used e-mail and fax to survey firms with capital ranging from $40 million to $1.5 billion, the average being $390 million.

They reported that in this year’s survey, venture capitalists gave the main reasons for their optimism to be:

  • Improved exit opportunities

  • Available money

  • Willingness to invest that money.

Those reasons were a distinct switch from 2003.

In that survey, VCs indicated their brighter view of things was overwhelmingly related to improvement in the economy and equity markets.

In the 2004 survey, the same reason fell to fourth place. It seems interest in early stage deals is increasing as well.

There were slight geographic variances in the survey responses. VCs in the South were the most optimistic, with a rating of 4.2, followed by the Southwest at 4.1. But the Midwest, and East and West coasts all followed closely at 3.9.

Venture capital companies who responded to the survey are found primarily on the West Coast and in the East, reflecting the physical location of the majority of venture capital firms.

Fund size in the survey ranges from small regional firms to major national firms.

Nationwide, the number of entrepreneurs seeking venture capital in 2003 increased, breaking the trend of the previous two years of lessened activity.  Contrary to the national results, the South saw a decreased number of entrepreneurs looking for venture capital while in the East the number was steady.

Other states in which VCs seem ready to lend are: Alabama, Arizona, California, Colorado, Connecticut, Georgia, Massachusetts, Maryland, Missouri, Mississippi, North Carolina, New Jersey, New York, Ohio, Oklahoma, Pennsylvania, Texas, Utah, Virginia and Washington. 

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