Venture Outlook for 2008 Is Promising Despite Slowing Economy, Venture Group President Says

Research Triangle Park, N.C. — Mark Heesen, president of the National Venture Capital Association, is pretty optimistic about the VC market these days even as the economy slows and initial public offerings as exits for VC-backed firms are becoming more rare than trifectas at Churchill Downs.

He’ll be one of the keynote speakers at the Council for Entrepreneurial Development’s 25th annual Venture Capital conference that’s set for Thursday and Friday at the Washingtonn Duke Inn in Durham.

In a preview of his opening remarks, Heesen talked with Local Tech Wirer about the state of VC and whether entrepreneurs should be hopeful in seeking investments.

With exit ramps for IPOs and mergers-and-acquisitions slowing in the first quarter, is 2008 shaping up as a tough year for companies seeking venture capital?

The IPO and M&A market will not have an impact on companies seeking venture capital because those seeking it are long ways away from going public or being acquired. Current market does not impact venture capitalists ability to invest in new companies.

The private equity markets raised considerable cash in the first quarter. What are you hearing about venture funds?

NVCA will be putting out new numbers Monday specifically on venture capital fund raising numbers and they appear to be pretty healthy. Many raised funds in 2006 and 2007, so you do not have as many venture capital firms raising money now. The new numbers may be lower than the fourth quarter but are still strong when you look at where we are in the cycle. I think the better questions is are limited partners interested in investing in venture capital and the answer is yes- there just are not as many asking for money today as there were a year or two ago.

Based on your own knowledge, is there much of an overhang between funds raised and funds invested by VCs?

I have never seen this overhang as a huge issue, venture capital firms will be smart and hold back some of their money to be able to continue to fund existing companies. So they will always be holding some money back.

How does this affect the funding environment?

Putting more money aside means fewer dollars for new investments so fewer companies at the end of the day will be funded.

What are you hearing about deal flow? Are VCs seeing good investment opportunities?

I think it is a good period in the venture space – deal flow continues to be good because there is always going to be entrepreneurs looking for money. Entrepreneurs now are more serious, committed and professional than before the bubble era. And you are seeing a whole new area venture capital investing and that is the clean tech space which could be very promising but we just do not know yet.

What sectors are particularly hot?

We continue to see extremely strong growth in the life science sectors, both bio and medtech. Clean tech another but you do not see a huge amount of money flowing into clean tech, but you are seeing a remarkable interest in the sector. VC’s are getting up to speed on the clean tech sector, learning the industry so you will see more and more deals in that sector over the next couple of years.

Is there a sector that has cooled from an investment perspective? If so, why?

One that has remained pretty consistent for many years now since the bubble is the communications arena. There has not been any dramatic movement.

The NVCA was quite aggressive in defeating proposed changes in tax legislation in 2007. Do you expect the issue to be raised again, especially if there is a change in the party winning the presidency? Will the NVCA stand its ground?

The issue was defeated in 2007. 2009 is the year when this will come back. Regardless of who wins the presidency, you will still see a congress that will forced to deal with tax reform and at that point it will be opened to very significant debate. We are already educating policy makers today as to the continued importance of venture capital.

Why should entrepreneurs be interested in this issue?

In the carried interest issue, if venture capitalists do not see it to be in their best interest to be venture capitalist, then less companies will be funded. As we go into 2009, we will go into talking about an increased capital gain tax and entrepreneurs are just as tax sensitive and there shareholders when it comes to the capital gains rate.

If the economy continues to sour, could we see a tightening again of angel capital investment?

Absolutely, if their stock portfolios continue to decline they will have less money to invest in long term projects.

Without early-stage funding, the creative cycle for new companies and technologies is slowed. What can NVCA do to increase the flow of dollars to early-stage deals, or does the NVCA see this as a problem that needs to be addressed?

You have seen an increase in the number of early staged deals being done by venture capital funds.

The NVCA will work to increase early stage funding by working with the angel community so that they invest in deals in such a way to make them attractive to venture capitalists as the company grows.

What’s the top item on the NVCA agenda for 2008?

There is not a lot of legislative matters that will be addressed. Over the next couple of weeks, we will very likely see continued debate over patent reform and the VC community is very concerned with current bill and its possible ramifications. This is followed very closely by the ability of venture backed companies to participate in small business administration programs is another areas of concern. The most big issues like immigration, tax policy and healthcare reform, will be left on table for a new congress in early 2009.

You visit the Triangle often. What are some of the factors you like about the region and state from the perspective of 1) the state’s VC funding industry and 2) the investment climate?

It’s a very cooperative environment. You have a very friendly group of core venture capitalists who work well with one another, service providers who cooperate with one another and a state government who understands the importance of this entrepreneur economy. The Triangle also have a university system that rewards entrepreneurs and many others have not gotten that idea.