Mid-Atlantic Venture Association (MAVA) Says 2008 Was Challenging, But Region Uniquely Positioned For Future Opportunities
Clean tech, health care IT, alternative energy and security sectors expected to show new strength
McLean, VA – January 30, 2009 – While deal closings slowed significantly during the fourth quarter of 2008 and overall year-in-review sentiments reflect global economic trends, the year in the venture industry ended better than many had expected, according to investor firm members of the Mid-Atlantic Venture Association (MAVA). On the up side, they see the potential of expanded opportunities for investment in alternative energy and other federal government initiatives such as security and health IT.
The market overview and forecast were the outcome of the quarterly survey of MAVA investor firm members and presented January 29. This survey edition encompassed a review of 2008, Q4 2008 results and forecasts about 2009. The survey was conducted via email and distributed using Vovici. It received a 29 percent response rate.
Compared with the fourth quarter of 2007 when 89 percent of respondents closed one or more transactions, the activity level for fourth quarter 2008 was down significantly with 64 percent of respondents reporting one or more closings for the period. The current level of transaction activity is more aligned with activity level in the fourth quarter of 2006 when 72 percent of respondents reported closing one or more deals. The forecast is for a similar level of transaction activity in the first quarter of 2009, with 63 percent expecting to close one or more deals.
“There’s no question that in this environment, cash remains king. Like everyone across the country, managing the expense burn rate is at a premium for portfolio companies in the mid-Atlantic, as our investors see an extended horizon for exits,” said Julia Spicer, executive director of the Mid-Atlantic Venture Association. “While new deal activity is currently at a slow pace, investors see that the mid-Atlantic region is uniquely positioned to benefit from federal initiatives, and MAVA members are optimistic about opportunities across several sectors that are expected to be priorities of the new administration. The fundamentals for our business remain strong and dropping valuations are creating funding opportunities.”
In other highlights, MAVA respondents noted that 2008 included the strong cash exits by SwapDrive and LeftHand Networks, which grabbed headlines. Behind the scenes, many venture capital investors are continuing to work closely with portfolio companies to preserve capital by lowering operational expenses, focusing on retaining and attracting key talent and staying close to paying customers.
• Expanded Opportunities Provide Positive Indicators
Investors anticipate that government stimulus programs will have a positive effect on the region. When survey respondents were asked what investment sectors would most likely see the greatest benefit of the stimulus initiatives, they identified the following areas: Clean Technology (27 percent); Alternative Energy (27 percent); Health IT (18 percent); Public Works Infrastructure (14 percent); Other (9 percent); Government IT/ Non-defense (5 percent).
• Desire to Preserve Cash Slows Deal Pace
The top reason cited for not closing more deals in the fourth quarter of 2008 was the need to preserve capital. One-third of respondents in Q4 2008 said that the uncertainty of the market economy encouraged the preservation of capital compared to only 8 percent who cited capital preservation as a barrier to transactions in Q3 2008. In response to current market conditions, 59 percent anticipate reserving more follow-on cash.
• Average Time to Close Deals Remains Steady
The time it takes for deals to close was not reported as significantly different in the fourth quarter of 2008, as compared with the same period year over year. In Q4 2008, 68 percent took four to six months to close deals whereas in Q4 2007, 63 percent closed within four to six months. Investors reported that companies with sales traction and strong products that people need immediately will continue to be good candidates for investment.
• Funds See Opportunities Across All Stages; Early Most Difficult
In response to the question “What stage would you prefer to see more deals,” prompted 33 percent to identify “balanced,” 33 percent to select “expansion,” 24 percent to prefer “early” and 10 percent to choose “late.” Investors reiterated that early stage investments will be even further challenged as lenders across the financial spectrum and around the globe fight pressures for realizing earlier returns.
About MAVA
The Mid-Atlantic Venture Association (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 $100 billion in capital under management. In addition, business and advisory professional services firms from the legal, financial, executive search and consulting fields are also MAVA members. For more information, please visit www.mava.org.
