2003 Outlook For Venture Capital Is Brighter

    January 6, 2003

Entrepreneurs polish up your PowerPoint presentations and practice your pitches, because the venture capital purse strings may be starting to loosen up.

The venture capital environment in the United States looks brighter for 2003, according to a survey of 74 venture capital companies located in 23 states. The study was conducted by Dee Power and Brian Hill, authors of ?Inside Secrets To Venture Capital,? and ?Attracting Capital From Angels,? John Wiley & Sons, publisher.

2002 About The Same As 2001

The venture capitalists were asked if the environment for entrepreneurs looking for early stage capital today is better or worse than 12 months ago. The VCs were asked to rate the environment from 1 to 5, 1 — being much worse, 5 ?- being much better.

The average rating was 2.8, about the same.

Rating Percent VCS responding 1 4% 2 37% 3 33% 4 25% 5 1%

The number of entrepreneurs looking for venture capital has fallen again for the second year. However the quality of the entrepreneurs? business plans the venture capitalists did receive, has substantially improved for the second year as well, according to the VCs.

A Brighter Outlook for 2003

When asked if the next twelve months would be better or worse than the current environment, 60% of the VCs said it would be better. Again the VCs were asked to rate the environment from 1 to 5, 1 ? being much worse, 5 ?- being much better. The average rating was 3.6.

Rating Percent VCS responding 1 0% 2 6% 3 34% 4 54% 5 6%

The three reasons most often given for the optimism were in order:

1. Overwhelmingly in first place — Improvement in the economy and equity markets

2. There is money available to invest

3. IPO markets and options for potential liquidity are improving.

Followed closely by

4. Valuations are more realistic 4. Portfolio triage is over 4. Capital Spending is up

Selected comments by the venture capitalists:

?I believe that the outlook will be improved 12 months from now in that the economy will be looking brighter and the VCs will be more anxious to deploy some of the capital that is burning a hole in their collective pockets.? ***

?I believe the economy is turning around and there is a lot of capital on the sidelines waiting to be placed into good opportunities. ***

?NASDAQ will improve? ***

Other reasons given were: Can?t get any worse Fly-by-night companies are gone

The negative venture capitalists blamed their pessimism on the economy not improving fast enough and the need to focus on their portfolio companies. Only two VCs mentioned terrorism or war as a factor.

There were some geographic variances in the responses. VCs in the Pacific Northwest were the most optimistic with a rating of 4.2, while New York VCs were the least optimistic with a rating of 3.3, but every region believed that the climate for entrepreneurs looking for capital would improve.

Pacific Northwest 4.2 Southwest 3.7 Midwest 3.7 California 3.5 South 3.5 East 3.5 New York 3.3

Overall the trend for the last few years has been upward. VCs rated the environment in 2001 as worse than 2000 with an average rating of 1.9. 2002 saw an improvement to 2.8. And the outlook for 2003 is 3.6, a substantial improvement.

2001 2002 2003 1.9 2.8 3.6

Now Is The Time

For entrepreneurs that have been waiting on the sidelines to start their search for venture capital, 2003 may be the best opportunity of the last few years. There is less competition and the attitude of venture capitalists towards funding early stage companies is more favorable.

Additional Analysis

Additional Analysis will be available throughout January and will cover:

What do venture capitalists think are the most critical mistakes entrepreneurs make in their business plan?

What is the one characteristic VCs think an entrepreneur must have to be successful?

What advice do venture capitalists give to entrepreneurs looking for early stage capital?

A referral by a trusted associate is accepted as the best way for an entrepreneur to be introduced to a venture capital firm. What other ways do VCs recommend for an entrepreneur?

The above results will be available on a regional basis as well. The regions include:

Pacific Northwest Southwest Midwest California South East New York

Dee Power is co-author with Brian Hill of
“Attracting Capital From Angels”
More info? email mailto:attractingcapital@capital-connection.com
and “Inside Secrets To Venture Capital”
More info? email mailto:insidesecrets@capital-connection.com