Venture Capitalists Optimistic in 2008

Venture capitalists are a different breed from the average work-a-day professional and craftstman. Venture capitalists are big money gamblers with a method to their madness. They are professional seers who put their money on the visions they foresee. And in 2008, venture capitalists are looking up.

Four out of five VCs said they expect improving returns in the next five to 10 years. And in the near term, VCs say they expect to raise money at a faster pace even as worries grow that the economic slowdown could become a recession. The net effect: There will be fewer firms, but they will manage larger funds. The market for initial public offerings will continue to improve, most VCs said.

... Investments will increase, VCs say, because of heightened interest in the capital-intensive clean-tech and life-science industries, both of which are perceived to be on the cusp of breakthroughs. Another factor is the accelerating effects of globalization, VCs say.

These industries "will not be exclusively U.S.-based, but have a worldwide platform which will require more time and more capital than ever before," said Mark Heesen, president of the NVCA, which represents about 400 venture and private equity firms. "That said, the other end of the spectrum - seed and early-stage investment and smaller, regionally focused firms - will also be very active, particularly in the Internet and new media spaces."

But for VCs, the global expansion is also causing some hesitation. The survey revealed some skepticism among VCs about the quality of investment opportunities in some developing regions. Twenty-eight percent said they are hesitant about investing more money into China, and 37 percent said they are leery of South America. Eastern Europe raised concern for 17 percent of the venture capitalists surveyed.

... Another reason for bullish attitudes: VCs and the limited partners whose money they invest - pension funds, foundations, university endowments, wealthy individuals and families - are increasingly confident that the tech industry has worked through the lingering effects of the boom-and-bust, which cost investors hundreds of millions of dollars.

Those losses are a prime reason why several venture firms are expected to close shop in 2008. Contrary to the popular image of VCs raking in regular jackpots, the performance of firms varies widely. An NVCA-sponsored report found that the average return on all U.S. venture funding in the five years ending June 30, 2007, was only 4.6 percent, albeit with a stronger showing in the most recent years. The 10-year return, however, was a strong 19 percent - conforming to a history that keeps investors funneling money to VCs.

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Of course there are VCs who are in the doldrums--pessimistic. They probably lost more bets than they won recently, and have not shaken it off yet. A VC has to be an optimist to stay in the game.

Given the distinctively unproductive and dysfunctional direction much government sponsored and foundation-sponsored research is heading, we will very much need the contribution of VC funded startups and enterprises in the near to medium future.