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Thursday, Feb 18, 2010Pepperdine University Study Shows 47% of Venture Capital Providers Say Lending Will Remain Restrictive for Next 12 Months
Posted by dgore
PRESS RELEASES
VCs Report Reviewing 100 Business Plans for One Letter of Intent;
27.5% Reported Making No Investments; 27% Say Some Investments “Worthless”
LOS ANGELES, Calif. — Nearly half of venture capital providers (47.7%) say lending will be more restrictive in the next 12 months. At the same time, most (70.5%) agree that demand for venture capital will grow according to a study by Pepperdine University’s Graziadio School of Business and Management. The findings on the venture capital industry are part of the Pepperdine Private Capital Markets Study released today that examines the current state and outlook ahead for the private capital industry.
Findings on the venture capital industry also shows that investing in clean tech companies is now more popular than software and medical devices, few venture capital providers have plans for raising funds in the next year, they are taking smaller stakes in investments, and they have high expectations for return on investment among many other findings.
“Results from our study suggest that the venture capital community is vulnerable to the same pressures and constraints as other segments of the public and private lending industry,” said the study’s author Dr. John Paglia, an associate professor of finance at Pepperdine University’s Graziadio School of Business and Management. “The long-road out of the current recession and tepid marketplace has made it easier to simply keep money locked up.”
Venture Capital Professionals Say…
Investing will be Restrictive in Months Ahead.
Nearly half, 47.7%, of respondents believe venture capital investing over the next 12 months will be more restrictive while 45.5% believe it will stay about the same and another 6.8% expect it to be less restrictive. The expected exit time on investments has increased and percentage of up rounds has declined over the past 6 months. Overall just 41% of funds are expected to fundraise over the next year.
Many Business Plans, Fewer Deals.
In order to close one deal, the typical venture capital provider reviews 100 business plans, conducts 20 meetings with principals, issues two term sheets, and signs one letter of intent. VCs report an increase in the number of business plans received as well as the number of high quality investment prospects, but the number of plans funded as well as the investment sizes have declined as the industry contracted. Nearly 27.5% reported making no investments in 12 months while 13.0% made one investment and another 18.8% made two.
Clean Technology More Popular Than Software Investments.
VC’s report investing the largest concentration of money in clean tech (14.5%) followed by software (13.5%), medical devices (12.2%) and biotech (9.8%). More than 35% of investments are expected to be in California.
Some Investments “Unsellable,” “Worthless.”
Funds reported that “Did not sell or worthless” ranged from 12.1% of the portfolio for Stage 5 investments to 25.7% of investments for Stage 1.
Taking Smaller Stakes.
Most equity investments made by venture capital firms are minority interests and range up to 49% ownership. Approximately 40.3% report taking equity stakes in the range of 20-49% while another 49.1% indicate less than 20%. Funds report applying a 20% discount to equity pro rata value for making minority investments.
Expect fewer IPOs.
A larger number of VCs report their intent, with regard to portfolio companies, to “sell to public company” than previously. The percentage of respondents indicating IPO as the exit plan declined from 17% to 12%.
Will Exit in 4-6 years.
For the current fund, approximately 35.3% of respondents indicate an expected weighted-average time from initial investment to exit for the entire portfolio of current investments to range from 4 to 5 years while 32.4% say 5-6 years and another 11.8% indicate 6-7 years.
Expect High Payout/ROI.
Regarding the current fund, approximately 49.1% report an expected weighted average sales to total venture investment ratio in the range of 3-4 times while 20.8% believe a payback of 1-2X is most likely and another 15.1% report an expected ratio of 5-6 times.
Make Senior Management Changes.
Respondents report making managerial changes when investing in new companies. In particular, 27.9% of the time a board member is assigned while the CEO is assigned 20.8% of the time.
Greater Returns for Limited Partners.
Funds expect a return to limited partners of 15% over the next year, which is a significant increase from the prior 12 months. New investments are expected to return 38.2% on average while the majority of expected returns range from 20% to 65%.
Background Not in Entrepreneurism.
Most VCs had a career in corporate finance prior to working in the field and nearly 70% assisted other startups with their development. However, just 45% launched their own entrepreneurial venture and 15% purchased and operated their own company. Furthermore, only 25% claimed experience working as a scientist prior to VC.
Have Varying Levels of Experience in the Venture Capital Industry.
Nearly 20.6% of respondents report having venture capital experience in the 2-5 year range, while 31.7% have logged in 5-10 years and another 27% indicate 10-20 years.
Nearly Half Rely on “Gut Feel.”
Interestingly, despite the lack of experience in non scientific / finance areas, a large number of VCs rely on gut feel to help guide investment analysis.
The venture capital data is based on interviews with 111 venture capital providers and is part of a larger study based on interviews with more than 700 professionals in the private capital industry. The Pepperdine Private Capital Markets Project is the first comprehensive and simultaneous investigation of the major private capital market segments. The 120-page study seeks to shed light on how private capital providers and others view their industry. The Pepperdine Private Capital Markets Study provides insights into four other private market segments in addition to venture capital: bank, asset-backed, mezzanine and private equity lenders.
Also, new for this report are findings based on responses from privately-held businesses asking for their opinions about lending.
With over 99% of companies having fewer than 500 employees, our economy is dependent upon the success of small businesses. The Pepperdine Private Capital Markets Project is critical step along the path of understanding and increasing the value of private companies and our economy. Professionals who work in the lending either for an institution or a specific fund are excellent bellwethers of what is ahead for other businesses and consumers. Through two survey cycles and published summary reports per year, lender, investors and the businesses that depend on them will be able to make optimal investment and financing decisions, and better determine where the opportunities to create lasting economic value may be realized.
The study is available at: http://bschool.pepperdine.edu/research/pcmsurvey/.
Related posts:
- Pepperdine University national study shows private capital providers have very high expectation for return on investment
- Venture capital firms still optimistic about fund-raising
- Shining a light on venture capital
- VC delusions
- Big gap between venture capitalists’ expectations and actual returns
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