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News and Information Article
Time Spent Evaluating New Deals Drops as Valuations and Term Sheet
Competition Rise
TIMONIUM, Md., Aug. 9 // -- The Mid-Atlantic Venture
Association (MAVA) today released its Q2 2006 MAVA VC survey results,
indicating that venture investors had an active investment quarter, as had
been previously forecasted in the first quarters survey results. However,
relative to recent quarters, VCs reported spending less time looking at new
investment deals. More than half of VC respondents have plans to raise a
new venture fund beginning in 2006. Amid a reported increase in merger and
acquisition activity, survey respondents indicate the majority of potential
exits in their funds portfolio companies to be via a merger or
acquisition. Additionally, survey results show increases in company
valuations and term sheet competition.
"This quarter we see VCs returning to sustained levels of investing
even as potential portfolio company liquidity events and fundraising
activities garnish an equal amount of investors attention," said Julia
Spicer, Executive Director of MAVA. "As more capital is deployed by
investors from both inside and outside the region, entrepreneurs will
benefit, often by increases in valuations and term sheet competition."
The venture capital survey is part of MAVAs 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 2006 survey was conducted via email and distributed to 406
member VCs using WebSurveyor, and received an 11% response rate.
Surveys Major Findings
Active Investment Quarter, Regional Deal Forecast Increases
Survey respondents reported deal activity in Q2 2006 was strong, as had
been previously forecasted. Seventy-four (74%) percent of respondents
reported participating in at least one deal in Q2 2006, in contrast to 53%
in Q1 2006. Previous survey results for deal activity in the second quarter
illustrate this quarters strength, as compared to a year ago with 64% in
Q2 2005 and two years ago with 66% in Q2 2004.
The outlook for investment activity in Q3 2006 remains optimistic, with
88% of investors predicting participation in at least one new deal. Of the
deals forecasted for Q3 2006, 46% of respondents expect at least 60% to be
in the mid-Atlantic region, illustrating a growing number of regional deals
over the last several quarters. In Q2 2005, 34% of VCs forecasted 60-100%
of deals will be in the mid-Atlantic and growing steadily over the last six
quarters to this quarters survey results of 46%.
VCs Spend Less Time with New Deals as Valuations Rise
As compared to the previous quarter, the percentage of VCs looking at
new deals 60% or more of their time was down in Q2 2006 to 14% from 21% in
Q1 2006. However, survey results from one year ago, Q2 2005, show only 10%
of VCs allocated 60% or more of their time looking at new deals.
Correspondingly, the percentage of VCs focused on growing and aiding their
existing portfolio companies increased to 22% of VCs spending over 60% of
their time with managing their current investments, as compared to 12% in
Q1 2006 and 14% a year ago in Q2 2005.
VC survey respondents opinions of "overvalued" valuations have
persisted over recent quarters. Q2 2006 survey data saw a sharp increase in
the number of respondents describing valuations as "slightly" overvalued,
jumping from 55% a year ago in Q2 2005 to 66% in Q2 2006. The number of
responding VCs that characterized valuations as "considerably" overvalued
doubled from 6% a year ago to 12% this quarter.
VCs See Competition, Increased Time to Close a New Deal
As previous survey results have indicated, an increase in valuations
often denotes an increase in term sheet competition. This quarter VCs
reported an increase in the number of companies that were "routinely"
receiving competing term sheets to 49% in Q2 2006 from 25% in Q1 2006. The
percent of companies receiving term sheets from investment firms located
outside of the mid- Atlantic region also increased with 62% of VCs
reporting that between 60% and 100% of term sheets were coming from
out-of-region venture firms as compared to 48% in Q1 2006.
VCs indicated that they took a bit more time to close a new deal in Q2
2006 with a slight increase in those taking 4-6 months to close a deal up
to 67% from 60% one year ago in Q2 2005. Correspondingly, a decrease in the
1-3 month timeframe to close a deal was noted with 24% of Q2 2006
respondents indicating the shorter timeframe as compared to 33% of
respondents a year ago in Q2 2005. Additionally, in Q2 2006 2% of
respondents indicated that it takes 9+ months to close a deal in their
firm, whereas 0% said that one year ago in Q2 2005.
Exit Predictions Stable, M&A Prospects High
Projections for exit activity over the next year continue to be
relatively positive and consistent with Q1 2006 results, with 16% of
investor respondents estimating that over 40% of their portfolio is well
positioned for an exit over the next twelve months. Investors are more
optimistic about exit activity over the next twelve months than they were
two years ago in Q2 2004, where 3% of respondents estimated that over 40%
of their portfolio would undergo a liquidity event over the following
twelve months.
Also consistent with the previous quarters results, the percent of VCs
forecasting 50% or more of their exits to be via a merger or acquisition
stayed relatively stable and high at 84% in Q2 2006 as compared to 82% in
Q1 2006. Corroborating this survey result, 46% of respondents indicated a
"slight" or "significant" increase in merger and acquisition activity in
the region in Q2 2006.
Fundraising Timeframes on Target, Shift in Size
A majority of responding VCs are either currently raising a fund or
will begin the process this year (52%), consistent with Q1 2006 results of
53%. Sixty-three percent (63%) of respondents anticipate that the fund they
are targeting will be larger than their previous fund, a slight decrease
from 66% in Q1 2006 survey results. An increase in the number of funds
targeting the same size fund as their previous fund increased to 26% in Q2
2006 from 18% in Q1 2006.
As for the actual size of the new fund, this quarters survey showed a
decrease to 0% in $150-199 million fund size compared to 11% 2 years ago.
An increase in firms raising the smaller fund size of $100-$149 million was
recorded, 25% in Q2 2006 from 15% in Q2 2004.
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 $10 billion 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 http://www.mava.org
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