I put this together a few weeks ago for TechJournal South's January issue and thought I would share it here as well especially after my post recently Top Entrepreneurs Make 2006 Predictions.
When I recently spoke with Frank Bonsal, co-founder of New Enterprise Associates, one of the nation’s largest venture capital firms, he said “the Southeast is underserved from a venture backing point of view and 2006 should be a good year.” I completely agree!
In fact, my prediction for 2006 is that we will see more new venture capital firms from other regions of the country not only start to look around the Southeast for new companies, but actually start investing here. That is great news for companies based throughout the region.
Fueling that interest will be increased competition for deals in other markets (Massachusetts and California) where valuations are much higher traditionally than the Southeast. Also, VCs are realizing that it is usually less expensive to build a company here.
But enough of my predictions. With just a few days into 2006, I asked six leading venture capitalists for their predictions for the new year. Participating are:
- Jeffery Bussgang, General Partner, IDG Ventures
- Roger Krakoff, Venture Partner, Sigma Partners
- John Glushik, Partner, Intersouth Partners
- Jason Trevisan, Principal, Polaris Venture Partners
- Bob Hower, General Partner, Advanced Technology Ventures
- Alan Taetle, General Partner, Noro-Moseley Partners
I am highlighting these VCs because they are all very interested in investing in companies throughout the Southeast. So, what are their forecasts for 2006?
The Year of Creative Exits; Traditional Media, Newspapers and Magazines Aren’t Dead…Yet; and The Capital Gap Continues
- Jeffrey Busgang, General Partner, IDG Ventures www.idgventures.com
With the advent of Sarbanes-Oxley, the IPO bar is still too high for most VC-backed start-ups. If the company doesn't have more than $100m revenue, four quarters of profitability and 8-10 years of operational maturity and history, it's an unlikely candidate. Besides, value-maximizing CEOs and VCs are not keen to pursue a financing event
that's not really an exit, given strict lock-up and public disclosure issues. Thus, M&A has been the VC-backed exit path of choice. Yet many companies are not necessarily appealing for M&A targets.
Therefore, 2006 will see more creative exit scenarios. Will VCs take a page from their private equity cousins and begin to use leverage to recapitalize companies and achieve their return? Will we see more aggressive redemption terms and board skirmishes to return excess cash? Will we see private equity firms and hedge funds come into VC-backed companies that have gained some revenue traction to buy out the early-stage VCs? Already, signs of these creative exits for impatient VCs sitting on 6-8 year old portfolio companies from the bubble days are emerging. More will follow.
Many have been predicting the demise of traditional publishing since the start of the Internet. The rise of Google has caused these calls to rise in volume. And yet, many of these companies just keep on ticking – and some are innovating into the online world through aggressive acquisitions (e.g., NY Times and About.com) and business transformations (e.g., IDG's transformation from a mainly traditional print businesses only to a successful media conglomerate of online, research, investment assets). But despite rumors of their demise, many of these traditional media properties will retain great value - as subscribers, brands and advertisers all prove to be stickier than most think. After all, scientists believe it took decades, not years, for the dinosaurs to disappear from Earth.
VCs continue to raise big funds, private equity firms continue to raise even bigger funds, and start-ups continue to fret about minimizing dilution. Thus, there remains a "capital gap" for the early, early-stage entrepreneur that only wants $1-4 million, but can't find a
strong market for that small a "nibble" in the private equity world. As a result, many entrepreneurs will push harder to hold their breath and self-fund in the earliest stages. And smaller VCs (some old, some new) will continue to flourish in focusing on this higher risk, higher upside class of opportunities.
Open Source and Mobile Markets Continue to Gain Traction; Larger M&A Deals Expected
- Roger Krakoff, Venture Partner, Sigma Partners www.sigmapartners.com
It is hard to look at the upcoming new year without believing it will not be more of the same. The trends of innovation continue strongly as many new companies are either coming out of stealth mode or generating their first revenues. Added to both a base of experienced entrepreneurs and a positive business climate the overall early stage environment would appear to continue to be quite positive for both company formation and commercial success.
On the B2B side, enterprises are looking to capitalize on ways to grow revenues and decrease costs. Two markets that will continue to benefit from this are technology enabled marketing (e.g. how do I find new customers or sell more to my current customers) and open source. One interesting trend is the return of hardware enabled or embedded devices that look to drive real productivity improvements in the enterprise (e.g. virtualization, enhanced security and the like). Open source will also continue to attract a lot of interest from all sides. On the consumer side, technology enabled early stage companies will continue to both attract attention and significant interest. Web 2.0 still strikes me as a fad but there is a lot of very interesting and promising innovation in the areas of media, personalization and e-commerce. Finally, with the cell phone ever more ubiqutious it still looks like mobile, mobile, mobile everywhere.
2006 will see continued consolidation suggesting that the M&A market will remain strong. One of the interesting developments may be a real increase in the number of larger deals if not IPOs as a wave of $50m+ companies that have been steadily growing over the past five years hit their stride. In all the coming year would appear to hold much promise!
Venture Investing Increases Further with Money Flowing to Later Stage Funds; Shortage Continues for Early Stage Companies in the Southeast
- John Glushik, Partner, Intersouth Partners www.intersouth.com
Venture investing in general should continue to increase, following the trend over the last year. Money has been steadily flowing back into industry as many institutional investors are increasing allocations to this asset class. But most of the dollars are going into later stage venture funds. I would expect that it will continue to be hard for early stage companies to find venture capital, especially in the Southeast where we don't have many regionally based early stage venture funds. We have a ton of great companies and technologies in this region, but not enough resident venture capital to support all of them.
In terms of sectors, I think we will see more and more investments in technologies that enable converged wireless devices and networks. Businesses and consumers are adopting wireless technologies faster than anticipated. The capabilities of the devices, the networks and the associated services are exploding, and the value propositions are compelling. I would expect investors to be interested in any company that can get a piece of this large and growing market.
Online, Online, Online
- Jason Trevisan, Principal, Polaris Venture Partners, www.polarisventures.com
The web is as mainstream as the television: broadband is undoubtedly the new standard; Internet advertising has surpassed the elusive $10B hurdle; a third of all shopping starts online; restaurants, tickets and handymen are found on the web; online media companies are profitable; and, oh yeah, it will all soon be wireless. Internet businesses that have built sustainable and scalable models have more real growth opportunities than they’ve ever had before. And those that have proven profitable models – driven by high gross margins coupled with efficient marketing – have access to significant cash flows for ongoing growth. Many of these companies shunned the VC community after 2000 and are now looking for smart partners to build billion dollar businesses.
Early stage online companies with promise are harnessing the power of video and entertainment; capitalizing on viral networks, sharing, and user-generated content; “mass producing” built-to-order goods; and aggregating disorganized marketplaces in creative ways. The behemoths are becoming more territorial of their traffic – they’ll rent but won’t sell – so brand building while penny-pinching is more important now than it has been.
Local markets remain elusive and expensive and vertical search is always dodging Google’s footprints. Price comparison engines will squeeze ecommerce (and retail) margins so service and convenience are critical costs of entry. But the Internet is still a baby so there is tremendous opportunity and a reinvigorated investment community.
More Emphasis on Acquisitions; Investment Opportunities Found in Contrarian Sectors
- Bob Hower, General Partner, Advanced Technology Ventures, www.atvcapital.com
M&A and IPOs: Expect continued emphasis on acquisitions rather than IPOs in the IT sector. The robust 2004 IPO market (93) was mainly due to pent-up demand from the previous 3 years. In 2006, you still have SOX regulations and the lack of coverage for small cap stocks that will prevent many companies from taking the IPO route (much like 2005, which will be about 50-60 IPOs).
VC ecosystem: There will be more attrition in the VC world with LPs realizing that 80% of the returns are going to the top 20% of VC firms. They are looking for stability and strong track records either from the firm itself or from an individual partner.
New investment opportunities: With a deafening buzz around Web 2.0 technologies, there will surely be interesting investment opportunities in "contrarian" sectors like enterprise software, which has been dead for the past year or so. However, look for a continued stream of rich apps that run primarily on servers and leverage AJAX/Flash technologies. Extending the endpoints of the internet will continue beyond RFID to sensors and other smart devices. Cheap, embedded displays will create new problems for traditional industries (and opportunities for the start-up tech world). Strong e-commerce growth will continue, fueled by new women shoppers and more sophisticated older shoppers, prompting more retailers and manufacturers to renew their internet efforts (and engage with firms like ChannelAdvisor).
Healthcare investing: Medical device investing will remain strong (with valuations for late stage deals continuing to heat up) mainly due to positive liquidity events. The life science side will be more mixed with investments funneling into two main categories: (1) licensing/roll-up plays where the VC acts more like a buyout firm and buys technology from larger pharma companies and (2) platform to product plays where the VC invests early stage and the company goes from IP to product.
Raleigh: very strong growth due to the comparative advantages of the area (education, QOL, COL) as long as it begins to rain again.
Biometrics, Open Source and Transaction Processing Are Hot Areas to Watch
- Alan Taetle, General Partner, Noro-Moseley Partners, www.noro-moseley.com
Biometrics. I believe that the stigma associated with biometrics will begin to decrease next year. With IBM and HP both shipping fingerprint biometrics on their latest laptops, business users will become more comfortable with this form of security. Biometrics will begin to appear on consumer devices like cellphones and, enabling richer applications and sensitive data to be securely stored.
Open Source. Open source applications continue to proliferate. Next year may be the first year that the Fortune 1000 begin to run open-source mission-critical applications on the open source stack. ERP, CRM and BI open source applications will gain substantial share and credibility.
Transaction processing. Contactless payment, stored value visa and mastercards, and lower cost money transfer opportunities will pervade. Security applications will be developed around these applications.
