Panel to discuss venture capital outlook Tuesday

January 23, 2004
Fairfield Country Business Journal, January 19, 2004
by Keith R. Reynolds
"There has been a lot of interest in this meeting regionally because of the timing and current market conditions," said David Yarnell, managing partner of Stamford-based BEV Capital and CVG Stamford chapter president.
John Taylor, vice president for research at the National Venture Capital Association, and Colin Blaydon, director of Tuck Center for Private Equity and Entrepreneurship and former dean of Tuck Business School, will make the opening remarks.
The forum will be at the Milbrook Club from 5 to 7:30p.m.
"Assuming a continued rebound of the public markets, venture-backed initial public offerings as well as merger and acquisitions will increase in terms of volume and valuations," said Taylor. "2004 should also see an improvement from 2003 in exit activity, particularly in the area of acquisitions, as information technology companies get sales traction and can begin the process of starting a track record."
It is expected that this increase in exit activity is likely to help halt the trend toward negative returns seen in recent years. Longterm, private equity performance will continue to outperform most other asset classes.
Nationally, the private equity industry expects to see an increase in fund-raising activity in 2004, though most deals today will be smaller, as venture capitalists resume prudent and consistent long-term investing.
The industry would continue at a pace of about $4 billion each quarter this year, with a possible slight uptick as investor confidence returns, said Taylor.
" 'Capital efficiency' is the watchword this year as the number of companies getting funded has not changed so much as the amount of money required," noted Taylor. "Another dynamic is that while investment levels are expected to replicate 1997-1998 time frame, the distribution of capital will be more in line with 1999-2000 as software, biotechnology, energy and communications will continue to be popular investment areas."
"Regarding the technology sector," remarked Taylor, "as earnings are expected to improve, corporate America will likely increase technology spending in 2004, helping to support the young technology companies that are on a path to go public."
He said the product cycle for these firms is changing from consumer and media-oriented Internet deals toward enabling software and networking infrastructure.
An additional change in recent venture funding is a greater allocation to the life sciences because biotech companies are receiving a much higher percentage of total investment dollars.
"As 'Big Pharma' has focused on delivering near-term profits to investors, the industry has chosen to let innovation occur in the entrepreneurial sector of the market," said Taylor.
Looking forward, investment in early stage ventures should see an increase since VCs are expected to shift their attention from a current defensive focus on existing portfolio companies.
"If one examines the venture capital business cycle from a macro perspective since the 1940s, and particularly over the last three decades, when the venture capital market has developed critical mass, these new and innovative companies will be the IPO and acquisition candidates of 2008 – 2011," concluded Taylor.
CVG service provider members are also seeing an uptick in activity and are cautiously optimistic for the coming year.
"Clearly, the post-Y2K lull in IT spending is coming to an end, and smaller IT firms are better able to sell their technology that in turn is helping them in their efforts to raise capital," said Bill Perrone, chairman of the business practice group at the law firm of Wiggin & Dana in Stamford.