Some dominant trends in VC investing in 2009

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Bangalore: For the venture capital (VC) funds, the year 2009 was no ordinary year. According to data from VCCEdge, the financial research platform of VCCircle, the deal volume fell by 44 percent from 502 in 2008 to 280 in 2009. VCCircle spots some dominant trends in VC investing, some of which will be a game-changer for the industry.

Keeping house in order: VC fund managers spent bulk of 2009 empowering their portfolio companies to beat the downturn instead of signing on new deals. A lot of effort went on receivables and ensuring a healthy top line growth for companies, he added. Not surprisingly, the deal volume crashed by 44 percent in 2009.

Renewable Energy and MFI garner VC eyeballs: With the government offering a generation-based incentive to wind power producers, this segment may see more action and deals. Microfinance, the other fast-growing niche, recorded 16 deals worth $80 million as on December 24, 2009, as per VCCEdge data.

Series B turns VCs' sweet spot: There is little action in early-stage investing with VCs putting their equity in companies with proof of concept, revenues and an initial round of funding. Investing in later-stage companies shortens the VC's gestation period. Series B, or second round of fund-raising by startups, turned a favoured investment stage with 24 deals in 2009 valued at $173 million against 15 deals in 2008 ($104 million), VCCEdge data shows.

VCs' interest in clean tech sector: Five years ago, when the first Global Venture Capital Survey was conducted, the results indicated some interest in clean technologies and the life sciences. This year, regardless of fund size, we see tremendous interest from VCs in both of these sectors, especially clean technologies, where more than six out of 10 respondents anticipate their investment levels to increase and another three out of 10 will hold their investments at the same level. Among U.S., UK and Israeli investors, about half expect to increase their investments in cleantech, while about seven out of 10 AP respondents and European respondents expect their cleantech investments to increase. Two-thirds of respondents from the Americas plan to increase their cleantech investments. This interest could be because we're seeing an increase in government/political support for cleantech and VCs are looking more to government participation in both investments and incentives.


VCs shifting focus to later stage firms: Very few are shifting to early-stage investing. Instead, about half are maintaining their current strategy and a significant percentage are shifting their focus to later-stage and existing portfolio companies. No doubt this is due to both the strain on the capital markets and the fact that it's now taking longer for companies to be acquired and rare for them to go public. Investing in later-stage companies shortens the VC's gestation period and allows them to exit sooner. "In this environment, it pays to be either a very early-stage investor or a very late-stage investor," said Steve Fredrick, general partner of Grotech Ventures. "The classic Series B round, where a business is still finding its legs and remaining capital requirements are at best an estimate, carries more risk given higher burn rates and the climate's uncertainty around future financings. So, we're seeing reduced investment levels as firms either invest smaller sums in very early-stage companies, or invest traditional sums in fewer and much later-stage companies. The middle ground has been largely vacated."

VCs' interest in India and China: Another trend that hasn't changed in the last five years is venture capitalists' interest in China and India. Regardless of the size of the firm, investors are intrigued by the investment possibilities of these two countries. Half of all respondents expect their investment levels to increase in Asia (excluding India), while 43 percent expect to increase their investments in India over the next three years. In 2007, 41 percent of respondents indicated an interest in expanding their investment focus in Asia Pacific. About one-third expect to increase their investment levels in South America. Only 17 percent expect to increase their investments in North America, the same as 2007.

Optimistic about future funds: Despite the fact that the world is struggling with a recession, VCs are remarkably optimistic about their future funds. Most VCs believe that their next fund will be either larger than their existing fund or will be approximately the same size. And, that's across the board, regardless of the size of the venture firm or where they're located. Among those managing more than $1 billion, 24 percent projected that their next fund size will increase while almost half expect it to remain the same. Less than a third anticipate a decrease. Those numbers are very close when it comes to those firms managing $500 million to $1 billion. As the size of the firm grows smaller, the firms grow more optimistic about the size of their next fund levels, with 60 percent of the smallest-those managing $1 million to $49 million - anticipating their fund levels will grow and another 28 percent stating that they'll remain the same.

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