Stronger exit market, more investment and improved economy among the 2014 predictions from venture capitalists & CEOs

“With a gridlocked Congress, it is imperative that we continue to educate lawmakers and regulatory agencies on the positive impact of venture capital to the U.S. economy and the unique attributes that make our startup ecosystem the envy the world. Case in point - immigration reform. We cannot allow the politics of the broad immigration reform issue to overshadow the line item we are focused on - immigrant entrepreneurs and the creation of a new type of visa to support them,” said Bobby Franklin, president and CEO of the National Venture Capital Association. “With our members and venture-backed CEOs expressing a bit of optimism for 2014, we must ensure that the positive momentum continues so that innovative technologies get funded, job growth continues, pension funds, university endowments and other limited partners see returns on their investments, and VCs are incentivized to take the risks no other asset class takes.”

 

The eighth annual Venture View survey reflects predictions from nearly 300 venture capital professionals and CEOs of venture backed startup companies in the U.S. collected between November 26 and December 11, 2013.

 

 

Most VCs (59 percent) and CEOs (57 percent) predict higher levels of venture investment overall in 2014. These expectations are higher than last year, when just 27 percent of VCs and 43 percent thought levels would increase.

Most venture capitalists predict investment increases in Business IT (73 percent of respondents), Consumer IT (58 percent) and Healthcare IT (57 percent). Sixty-two percent of VCs predict decreases in clean technology investment, while 46 percent see fewer dollars going into medical
devices and 31 percent see the same for biopharmaceuticals. As with last year, Consumer IT was most often predicted as ripe for overfunding in 2014, with 53 percent of all VC respondents citing the sector. Additionally, Medical Devices was again most often predicted as underfunded,
with 39 percent of VCs saying so. 

 

Latin America was cited by 50 percent of VCs as an area of increasing U.S. investment in 2014, followed by Africa, China and Western Europe (all at 26 percent). India, which VCs predicted would see an increase in U.S. venture dollars in 2013, is expected by 40 percent of respondents
to see a decrease in investment levels. Thirty-two percent of VCs also expect China to see less investment.

On the company front, of the CEOs surveyed, 70 percent are planning to increase their global activity. None reported plans to pull back globally. Sixteen percent do not have global operations and 14 percent will maintain their current global activity levels.

Fundraising Environment for Venture-Backed Companies

Sixty-nine percent of the CEOs surveyed plan to raise additional funding in 2014. Thirty-one percent of CEO respondents believe it will be easier for them to raise capital than in 2013, while 55 percent said it will be the same as in 2013; 38 percent think it will be more difficult than last year. According to 45 percent of the venture capitalists, the hardest funding round to obtain in 2014 will be Series A. Series B was cited as the hardest by 42 percent of the VCs, followed by Series D and Beyond at six percent. Forty-three percent of CEOs believe terms will favor VCs in 2014 while 35 percent say VCs and entrepreneurs will be treated equally. VCs are more evenly divided with 34 percent expecting terms to be more favorable to investors, and 34 percent predicting terms to favor the entrepreneur and the VC equally.

 

Both CEOs (50 percent) and VCs (49 percent) are optimistic about next year’s exit market, expecting 2014 total IPO volume to increase. However, only 26 percent of CEOs and 25 percent of VCs predict IPO quality will improve. When asked to predict IPO levels by industry, 64 percent of VCs expect more tech IPOs, 43 percent expect fewer life sciences IPOs, and 53 percent think there will be fewer clean tech offerings.

 

VCs and CEOs agree that acquisitions will be more prevalent in 2014 with approximately 70 percent of both groups predicting volume increases for next year. Much of this volume will be driven by technology acquisitions, with 70 percent of CEOs and 74 percent of VCs expecting more transactions within this sector. Regarding the quality of acquisitions, 36 percent of CEOs and 51 percent of VCs expect an improvement in 2014. 

 

When asked to select all possible outcomes for their companies in 2014, 49 percent of CEOs chose acquisition, 41 percent predict no change, 23 percent say a private-to-private sale is possible, and 12 percent report an IPO could occur.

 

 

The 2014 fundraising environment is likely to remain challenging for venture capitalists with 45 percent expecting the market to concentrate, with more dollars raised by fewer funds. This prediction aligns with the trend of fewer venture capital firms raising the bulk of the capital industry wide.

Conversely, 35 percent of VCs believe the market will expand, with more dollars raised by more funds. This represents a significant increase from the nine percent of VCs who made that prediction for 2013. Regardless of the amount of fundraising that occurs in 2014, 45 percent of VCs expect agreements to favor LPs in the coming year while 41 percent percent believe terms will treat LPs and GPs equally.

 

A majority of VCs (75 percent) and CEOs (64 percent) do not plan to take advantage of new rules allowing for general solicitation and crowd funding in 2014. However, 28 percent of CEOs and 17 percent of VCs say they will consider it in the new year.

 

 

Most venture capitalists (75 percent) expect to see improved returns in 2014. Additionally, 62 percent of VCs predict higher company valuations and 25 percent believe valuations will remain unchanged. Meanwhile, a large majority - 84 percent - of CEOs predict increased valuations for their companies next year; 11 percent expect valuation levels to remain the same, while just five percent expect a decrease.

 

 

Eighty-seven percent of CEOs surveyed expect to increase their employee headcounts in 2014. Forty-seven percent believe this hiring is achievable based on supply and demand. Nineteen percent predict hiring will be difficult next year due to a low supply of talent, while 18 percent say a lack of qualified candidates will cause hiring challenges. Sixty-one percent of CEOs believe corporate technology spending will increase; 27 percent see it remaining the same; and only 13 percent predict a decrease in 2014.

U.S. Economy and Legislative Reform

Sixty-three percent of CEOs and 61 percent of VCs expect the U.S. economy to improve in 2013. This forecast is more optimistic than last year’s, when just 49 percent of CEOs and 42 percent of VCs predicted economic improvements. When asked to select one region other than Silicon Valley, New York, and New England that is poised for growth in 2014, VCs chose Southern California (18 percent), the Southwest and Mid-Atlantic (17 percent each), the Northwest (15 percent), and the Midwest and Southeast (13 percent each). CEOs ranked these regions slightly differently, with the 20 percent identifying the Midwest, 18 percent Southern California, 16 percent the Southwest, and 14 percent the Southeast.