Venture Capitalists are Bullish on Consumer Internet Companies—and New York
BY Kimberly Weisul
As much as VCs may complain about 'froth' in the market, a new survey shows that they don't expect it to go away soon. And they pick New York over Boston as the place for hot start-ups.
When it comes to start-ups, New York is the up-and-comer, not Boston. Mitt Romney will be the Republican presidential nominee, but it won’t matter—President Obama will win a second term.
Those are some of the conclusions from the National Venture Capital Association’s sixth annual ‘predictions’ poll, which asks 250 venture investors and 250 CEOs of venture-backed companies to pull out their crystal balls and tell us what 2012 will look like. Besides picking top cities for start-ups and the winner of the next Presidential election, the VCs and CEOs also give their perspectives on the strength of next year’s fundraising environment.
Froth? What froth?
Venture investors and angel investors have been complaining quite a bit about ‘froth’ lately, accusing the industry as a whole (but never their own funds) of making unwise deals at unwise valuations, just because they’ve got money that has to be put to work. Despite the warnings, VCs seem to think that the amount of money available to entrepreneurs will not change dramatically in 2012. They’re evenly split between those who think the amount of money available will increase, decrease, or stay the same.
If there really is a lot of froth in the market, you’d expect to see term sheets that favor CEOs at the expense of investors. But neither VCs nor entrepreneurs expect that to happen. More than half of venture investors and their CEOs expect term sheets to favor investors next year. Some say the term sheets will treat both parties equally, but only about 12 to 15 percent—depending on whom you ask—expect entrepreneurs to come out ahead.
Where venture capitalists do see a pinch (or an end to the froth, depending on your perspective) is in the angel business—58 percent say they expect that there will be a shortage of seed or early-stage funding next year. And they think that angels are going to see their returns decline relative to VCs, with 62 percent saying angels will do worse than VCs and 26 percent saying the angels will have roughly the same returns as VCs. Just 12 percent thought angel investors would do better than VCs in 2012.
Where they money is headed
Silicon Valley has long been the epicenter of venture investment, of course, and for years, New York has been trying to catch Boston to reach the number two spot. In the third quarter of 2011, New York attracted more venture capital (about $831 million) than Boston for the first time. Venture investors seem more willing to place their bets on New York in the coming year, too, saying that it’s more likely than Boston to become a better ecosystem for entrepreneurs. While 25 percent of VCs say the environment in New England will improve next year, some 27 percent actually expect the environment in New England to get worse. Meanwhile, an impressive 46 percent of VCs say New York is on the upswing, compared to just 18 percent who expect to see it decline.
Part of this is probably explained by the different types of companies—start-ups and otherwise—that tend to cluster in different regions. Almost two-thirds of the VCs said they expected to see more money going into consumer information technology companies. So New York, with its traditional strengths in media and advertising, should do well there.
But fields such as clean tech, medical devices, and biopharma are likely to take a hit next year, with more than half of VCs expecting that the amount of money directed to early-stage companies in these sectors will decrease. Biopharma and biotech have been especially strong in the route 128 corridor near Boston, but many investors are finding that those companies, along with clean-tech startups, require massive ongoing investments that few venture capitalists are equipped to handle.
Half of the venture investors surveyed say they will invest internationally. That’s pretty impressive for a crowd that used to flinch at the thought of making an investment into a company located on the far side of the San Mateo bridge. China and Western Europe are the favored locations, with 19 percent of venture capitalists saying they’ll be active in each region.
CEOs surveyed are slightly more optimistic than VCs about the overall economy, with 53% saying they expect it to improve next year. Only 47% of VCs say the economy will get better. But they expect that to be enough for President Obama: Both groups expect him to be the winner in the general election.