Archive for December 19th, 2012

Venture Financing Forecast for 2013: Partly Cloudy With Lower Chance of Success

By Russ Garland

Concerns that Series A rounds will be hard to come by in 2013 are widespread in the venture business, according to a survey being released today.

Forty-five percent of venture capitalists think this will be the most difficult financing to obtain, according to a survey of venture capitalists and startup chief executives by Dow Jones VentureSource and the National Venture Capital Association. That reflects an ongoing debate in the industry about whether seed-stage investors have financed too many consumer Internet startups that will now have trouble tapping the venture capital they need to grow.

Only 13% of the VC respondents said seed/angel financing would be the hardest to get in 2013 while 28% thought it would be Series B financing. The survey, conducted from Nov. 26 to Dec. 7, collected responses from more than 600 venture investors and CEOs of venture-backed startups. Responses were equally divided between the two groups.

A plurality of CEOs-42%–thought it would be more difficult to raise follow-on financing in 2013 versus this year; 36% said it would be the same difficulty and 22% said it would be less difficult.

Nonetheless, 67% of the CEOs said their company will raise additional capital in 2013. And 78% of them thought their company’s valuation would increase. But VCs were less sanguine–38% said valuations in their portfolio would decrease in 2013 compared with 2012.

VCs and CEOs were also of different minds when it came to forecasting the amount of U.S. venture investment next year. Venture capitalists were pessimistic, with 47% saying it would decrease, while 30% of CEOs said it would decrease.

VC attitudes are probably shaped by the frosty fundraising landscape. Of the respondents, 44% said venture capital fundraising would contract in 2013 with less money raised by fewer funds. Another 42% said it would concentrate with more money raised by fewer funds.

“Overall quality of companies is increasing; VC will continue to contract but overall achieve better quality,” said one of the respondents, Derek Small, CEO and president of drug developer Naurex, which this week announced it had raised $38 million in Series B financing.

VCs were upbeat about fund performance, with half of them expecting venture capital returns to improve in 2013. Most VCs predicted that the IPO market would be at least as good as this year, with 40% saying there would be more IPOs than in 2012 and 52% saying the quality would be higher.

Sandy Miller of Institutional Venture Partners said, “2013 should see a sustained good IPO environment rather than the starts and stops of recent years. All the ingredients are in place.”

Such optimism about the IPO market was another point of disagreement between VCs and CEOs, however, as just 29% of CEOs expect the number of IPOs to increase and 37% say the quality will be higher. The two groups agreed, however, that there would be more acquisitions next year of venture-backed companies, with 62% of each group predicting an increase.

Venture investors expect a pickup in business IT and health-care IT investing in 2013, with 61% and 57% seeing increases in those sectors, respectively. Interest in consumer IT has ebbed, with 35% of VCs forecasting an investment increase and 40% foreseeing a decline.

“The B2B tech private company valuation bubble will grow and then pop in October,” predicted Scott Maxwell of OpenView Venture Partners.

VentureSource is a research unit of VentureWire publisher Dow Jones & Co.

Write to Russ Garland at russell.garland@dowjones.com. Follow him on Twitter at @RussGarland

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