In polling 270 venture capitalists, corporate buyers and entrepreneurs, KPMG found that 73 percent of respondents expect their firm's revenue to stay the same or increase in 2009. In fact, 52 percent expect revenue growth to increase, including 37 percent who predict revenue growth in excess of 10 percent. Only 26 percent see declining revenues in the year ahead. KPMG conducted the survey in collaboration with AlwaysOn, the venture capital new media organization.
The outlook on sustained revenue growth is the silver lining to a tough year that has seen the fewest VC portfolio companies go public since 1977. In fact, the KPMG survey found that venture capitalists expect the negative IPO trend to continue in 2009, with 88 percent of respondents expecting IPO activity to stay the same or to decline further. Additionally, 82 percent of venture capitalists surveyed indicated that they do not anticipate recovery in the IPO market for at least 12 months. The outlook on IPO activity has clearly impacted venture capital exit opportunities, and 80 percent of respondents said less than 20 percent of their portfolio is poised for exit in 2009.
The decline in IPO opportunities coupled with the expected, continued regression in valuations of venture-backed companies, may influence the venture capital community to see acquisitions as liquidity and exit opportunities. When asked about valuation of venture backed companies, 84 percent of respondents predicted decreasing valuations, while only six percent see an increase. With valuations declining, 58 percent of respondents see M&A increasing next year.
"There is no question that economic and market conditions have made the current environment difficult for venture capitalists," said Packy Kelly, KPMG partner based in Silicon Valley and co-leader of its venture capital practice. "These conditions may lead investment firms to focus on the health of existing portfolio companies and slow the pace of investment. But the commercialization of products in the clean tech sector probably contributes to a large degree to the expected growth in revenue of emerging companies.
According to the KPMG survey, the outlook on investment levels and deal volume for 2009 mirrors the views on IPO activity. In fact, 74 percent of respondents expect overall venture investment to decrease and 82 percent see a decline in deal volume. While it is uncertain when venture investment will trend back up, 50 percent of venture capitalists surveyed don't expect that up-tick to occur until the second half of 2009, while 32 percent predict it won't happen until 2010 or beyond. Only 18 percent predict the turnaround in venture funding will start in the first two quarters of 2009.
While overall investment levels are expected to be lower, the KPMG survey found that 2009 funding will be targeted toward key geographic regions and industry segments. Respondents indicated that China, India and Israel will be the most attractive regions for venture capital, while clean tech, life sciences, mobile and digital entertainment will remain the hot industries.
"While overall funding will decrease, venture capitalists will continue to invest in those areas they feel will provide the best return on investment," said Brian Hughes, KPMG partner based in Philadelphia and co-leader of its venture capital practice. "Not surprisingly, they continue to be bullish on emerging markets and industry sectors, such as clean tech, that project near term growth."
Another indication of the current market conditions' negative impact on the venture community can be seen in attitudes toward start-up investing. Ninety-seven percent of venture capitalists surveyed said the credit crisis will have an adverse effect on the availability of venture financing to start-up companies, and 73 percent said it will be harder to get debt or lease financing.
