The worst of the crisis is evidently behind us; however, according to this quarters VC Indicator, venture capital investments aren’t forecast to return to pre-crisis levels in the near future.
This quarters VC indicator, the 30th research report administered by Deloitte Brightman Almagor Zohar, shows that 74% of venture capital managers in Israel forecast valuations to increase in the next six months, 59% forecast valuations to not change, and 15% forecast a drop in value. Only 26% of venture capitalists forecast an increase in valuations in startups in the next six months.
The research report also projected that 89% of venture capitalists don’t believe they will be a dramatic increase in the number of investment transactions in startups during the next six months. Whereas, 48% of venture capitalists forecast only a slight increase in investment transactions, 33% predict there’ll be no change in investment transactions and 8% believe they’ll be a drop in transactions. Only 11% forecast a dramatic increase in the number of investment transactions in startups.
Additional data that aided in reflecting the current weakness in the venture capital industry included only 19% of venture capitalists claiming that they are going to focus on new investment activity. Whereas, a majority (67%) of venture capital time will be allocated towards management of the existing portfolio with the understanding that the crisis is far from over and many challenges still lie ahead. This is also reflected by the minimal focus geared towards capital raising (7%) and deal flow screening (7%).
Tal Chen, C.P.A, Technology, Media and Telecommunications Industry Leader in the audit and consulting firm Deloitte Brightman Almagor Zohar stated that “there are many economic signs projecting that the worst of the crisis is evidently behind us, however, the venture capital industry seems to be heading to a new normal. The new normal will be a period that differs to that of the pre-crisis era, such that management of the existing portfolio will be the focal point for resource allocation”.
Probably the most striking alteration in the industry relates to the increases in late stage investment, in comparison to the pre-crisis era. The persistence of this trend is reflected by 50% of future investments are forecasted to be allocated to early stages, whereas this figure averaged 70% for the period prior to the credit crunch (during the second half of 2007).
According to Tal Chen, “the venture capital industry is crawling to a new normal, a normal that differs to before the credit crunch. The drop in early stage investments will be the driving force for a strengthening of government grants for Research and Development”.
Additional data reflects that 70% of venture capitalists expect that the next initial public offering (IPO) for an Israeli company on the NASDAQ, will not take place prior to the second quarter of 2010. 15% of venture capitalists forecast that an IPO for an Israeli company on the NASDAQ is imminent, whereas an identical rate predicts the first IPO to occur in the first quarter of 2010.
Only 8% of venture capitalists believe that there’ll be an awakening in mergers and acquisitions during the upcoming quarter, while only 23% expect the M&A market to ramp up during the first quarter of 2010. In addition, 69% expect that the emergence in M&A activity will not take place prior to late 2010.
Despite the manifestation of negativity in the market arena, optimism is beginning to emerge through initial signs for an awakening in Deal Flow activity and in Exits. An inference can also be made for further Private Equity activity in comparison to prior periods.
The apparent increase of optimism is also reflected in venture capital views in the economic condition in Israel. 48% of venture capitalists forecast an improvement in the economic situation, whereas 45% believe that the situation will bear no change in the next six months. In addition, 85% of venture capitalists don’t expect a full recovery to be achieved earlier then the end of 2010.
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