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Mid-Atlantic VCs Pick Up Investment Activity as Market Appears to Favor Entrepreneurs

Valuations, Term Sheet Competition & Exit Opportunities Increase

(August 11, 2005, Timonium, MD) - Data released today by the Mid-Atlantic Venture Association (MAVA) illustrates that VCs have become more active investors in the previous quarter of Q2 2005 and plan to continue the stepped-up investment pace in the coming quarter. The increased investment activity in the region appears to come at a time when market conditions are favoring the entrepreneur, not necessarily the venture investor. In the data released today, the majority of VCs indicated that they consider the pre-money valuations (the estimated value of the company seeking the investment) to be overvalued, with an increase in companies routinely receiving competing term sheets from VC firms. Both factors contribute to a market where the entrepreneur may have an advantaged position with their company having a higher value and thus being able to court multiple investment opportunities for the most favorable investment terms. Additionally, investors reported an increase in the expected number of companies that will experience an "exit" in the next year, principally either through a merger or acquisition.

"The climate for venture investing is ripe with opportunity in the mid-Atlantic region for both entrepreneurs and VCs", said Julia Spicer, Executive Director of MAVA. "As VCs have returned to sustainable levels of investing we are seeing the promise of healthy returns via growing exit opportunities while entrepreneurs are benefiting by garnering higher values for their companies and multiple investment offers."

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 Q2 2005 survey was conducted via email and distributed to 440 member VCs using WebSurveyor, and received an 11.4% response rate.

Survey's Major Findings

Investment Activity Rises in the Face of Slightly Overvalued Valuations

In Q2 2005, VC respondents reported that 64% participated in one or more investments. Although VCs had predicted even greater activity in Q2 2005, the actual investment figure does mark a modest increase of 6% in deal investment activity from the previous quarter's result of 58% in Q1 2005.

Investment activity is expected to continue to rise with 72% of VCs forecasting to close 1-2 deals in Q3 2005 despite the fact that the majority of responding VCs considered current funding opportunities to be overvalued (49% "slightly overvalued", 6% "considerably overvalued"). However, a healthy percentage of 43% felt that the pre-money valuations in the past quarter were "on target" and only 2% reported valuations to be "undervalued".

VCs Report Stability in Deal Flow as Term Sheet Competition Rises

General sentiment on firm deal flow closely resembles last year's survey results, indicating stability in this portion of the market. Though opinions are mixed, 60% of respondents believed that the quality of deals at their firm has improved over the past year relative to prior years. Over the past year, 29% of VCs felt that deal flow had "remained the same" within their own firms, consistent with the results of a year ago (28% in Q2 2004).

When asked to assess the current state of deal flow in the mid-Atlantic region, 38% felt that investment opportunities were increasing slightly, while 42% saw no visible change in area investment opportunities.

Very few firms report seeing large quantities of deal proposals coming through their firm with only 12% seeing over 150 per month, consistent with the 18% response rate for the same time period a year ago. However, the percentage of firms that reported seeing "less than 50" deal proposals per month increased this quarter to 40% from 21% a year ago.

Consistent with the results from the previous five quarters, VCs again noted a high percentage of companies "occasionally" (60%) receiving and "routinely" (28%) receiving competing term sheets over the past quarter. There was a slight increase in the recorded percentages from a year ago (Q2 2004) with 58% "occasionally" receiving and 24% "routinely" receiving competing term sheets.

Number of Exit Opportunities Forecasted to Grow

VCs expect increased activity in the number of investments that will "exit" over the next year than in the previous year, with 58% indicating that 20-40% of their portfolio will exit in the coming year, as compared to only 30% in Q2 2004. The percentage of investors that felt 40-60% of their portfolio would exit increased from 2% a year ago to 12% this quarter.

This quarter's survey results illustrated forecasted growth in the merger and acquisition (M&A) market, one exit path available to venture investments. When asked to appraise the current state of the M&A market in the region, 46% said "activity was increasing slightly" and 14% said "activity was increasing significantly". Only 26% saw no visible change in M&A activity and 4% felt the market was declining slightly. Investors are more optimistic about exit activity than they were a year ago in Q2 2004 with 67% of respondents estimating that less than 20% of their portfolio would undergo a liquidity event over the following year.

Target Size of New Funds Changes, Core Investment Strategies Remain

When compared to the survey results from the same time period a year ago, the Q2 2005 survey data shows that more investors anticipate that the fund they are currently raising or are planning to raise will be of different size than their previous fund, with most investors still expecting to raise larger funds. While 56% of VC respondents in the second quarter of last year (Q2 2004) expected their new fund to exceed the size of their previous fund, 66% this quarter (Q2 2005) believe their new fund will be larger than the previous. Conversely, only 2% of survey respondents last year (Q2 2004) were targeting a smaller fund than their previous. This quarter's survey results show 6% of VCs estimate the size of their new fund to be smaller than their previous. The percentage of respondents expecting a fund similar in size to their previous fund fell from 34% a year ago to 23% in Q2 2005.

This quarter, VCs reported that 70% have not changed their core investment strategies recently, while 10% have diversified the stage of their typical investments and 14% have expanded their geographic scope of where an investment company is located. Some firms however have either added expertise in new practice areas (8%) or diversified into new industry sectors (8%).

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About MAVA

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, please visit www.mava.org.

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