NVCA Picks Venture Investment Themes for 2005

The National Venture Capital Association has an interesting release out today summarizing thoughts from top-tier U.S. VCs on investment themes and issues in 2005. It’s worth reading in its entirety, but here are some quotes appended to the release:

On compelling investment sectors:

“The telecom market will pull a Rip Van Winkle and awaken from its three
years of slumber.  Having skipped a full generation of technology, the
market will rebound in earnest.”
— Chad Waite, OVP Venture Partners, Kirkland, WA

“Biotechnology has emerged as the white knight of the venture capital
industry.  Historically, information technology liquidity has been robust,
but current biotechnology liquidity will outperform IT liquidity by 2X.
Within life science, clinical stage pharmaceutical products now represent
nearly 90% of all IPO’s, which is up from 50% in the 1999-2002 timeframe.
This trend will continue. Even with the scientific advances of recent years,
we are an aging population suffering from dozens of underserved diseases. It
is the diversified venture capital funds investing in counter-cyclical
sectors that will provide consistent, top-quartile liquidity. Biotech is
here to stay.”
— Jim Healy, MD, PhD, Sofinnova Ventures, San Francisco, CA

“Private equity and venture capital firms will continue to be attracted to
established Internet companies, particularly those companies who have proven
business models and have demonstrated profitability and positive cash flow.
Software companies that deliver products as an On-Demand service are also
expected to be attractive to investors as corporations seek to minimize the
upfront investment and deployment time to implement an application. Outside
of technology, the financial services and consumer services space is
expected to provide attractive opportunities as is the healthcare services
sector especially companies that serve to reduce healthcare delivery costs
and increase the quality of care.”
— Walter G. Kortschak, Summit Partners, Palo Alto, CA

“The results of our recently fielded “FTVentures” IT Outlook, a survey of
our financial institution Limited Partners who control 1/3 of the world’s
financial industry IT spending, indicate that the new year will continue to
show plenty of promise for companies offering solutions in the areas of
compliance, business continuity and security.   Storage needs, driven by the
stricter regulatory environment, are up a whopping 50% at most corporations.
We also see opportunities for companies with business intelligence offerings
for revenue growth and cross channel initiatives, an area our LP’s told us
they will ramp up in 2005.”
—  Bob Huret, FTVentures, San Francisco, CA

“I predict an increase in biotechnology mergers, acquisitions and broad
strategic alliances including 4 to 6 sizable deals in 2005. I see this as
part of a trend in which larger biotechnology and pharmaceutical companies
are turning naturally to smaller biotechnology companies to fill their
research and development pipelines.”
—  Farah Champsi, Alta Partners, San Francisco, CA

On the promise of innovation:

“Advertising as we have known it is over.  Brand owners need to go where you
are, and that isn’t on network television or the newspaper.   In order to
promote their brands and attract and maintain relationships with consumers,
brand owners will have to come to you, on your wireless device, with your
media stream, on your pc.  In addition, they’ll have to follow you wherever
you go — into the retailer, the entertainment venue, or your place of
business.  As this revolution occurs, it will create huge opportunities for
those companies who have created compelling in-venue experiences that can
incorporate brand messages in a seamless manner.  Also to benefit will be
those companies who have created new and interesting ways to make brand
advertising fun, unobtrusive, personalized, relevant,  and continuing for
the consumer.”
— Heidi Roizen, Mobius Venture Capital, Palo Alto, CA

“2005 will be a year of significant change in digital media on the home
front. As broadband bandwidth and penetration increase, companies will
explore new ways to access and share content throughout the household that
was previously trapped inside the PC. The shift from traditional televisions
to LCD panels creates a gateway for personal and public content to move out
of the home office and into the center of family life. The volume of photos,
videos, music and other digital content will continue to grow exponentially,
and businesses that can help users easily find, purchase, enjoy and protect
the files that matter most to them will see big opportunities.”
— Joanna Rees-Gallanter, Venture Strategy Partners, San Francisco, CA

“Biometrics, and in particular fingerprint recognition, will emerge as an
exciting new end-user technology in 2005.  Trying to remember an
ever-expanding set of passwords is becoming a hopeless exercise, driving
people to self-defeating practices such as posting notes on one’s computer.
Fingerprint recognition is a cheap, easy-to-use and effective way to replace
passwords with a technology that guarantees access to those who are
authorized.  The recent product introduction by Microsoft, which quickly
sold out in many computer stores, validates the consumer opportunity, while
young companies like Digital Persona, Upek and newly-public Cogent are
demonstrating that fingerprint recognition technology is a priority for both
enterprise and government.”
— Alessandro Piol, INVESCO Private Capital, New York, NY

“Biology is a complex beast. The entrepreneur community is in the early, but
very promising stage of applying innovative cross-discipline approaches that
examine the myriad differences in individual makeup so that one day soon
diagnostics and therapies will move beyond ‘one-size fits all’ and to
better, focused and more personalized medicine.”
— Bill Ericson, Mohr Davidow Ventures, Menlo Park, CA

“2005 will be the year when having your computer network or enterprise
software application up and running 99.9% of the time won’t be good enough
anymore. Users and top management will demand 99.999% reliability, otherwise
known as Five 9s reliability — the kind of always-on functionality you
expect from your telephone or your TV. That means CIOs will have to reduce
downtime from an average of 8 hours and 45 minutes per year to no more than
5 minutes and 15 seconds per year. It’s a tall order.”
—  Shanda Bahles, El Dorado Ventures, Menlo Park, CA

On overseas investment:

“We see U.S. venture capitalists investing more overseas in 2005. This trend
will grow as domestic investing gets harder and venture capital becomes more
plentiful. But our experience over 36 years is that investing overseas is
inevitably more difficult than investing at home. We think the more
effective strategy for dealing with the growth of foreign markets is to
invest in U.S. companies with innovations in materials, energy, consumer
electronics, biotech, and medical devices that foreign markets will buy.”
— Bob Pavey, Morgenthaler Ventures, Cleveland, OH

On VC and the economy:

“2005 will bring a new spotlight onto venture capital, and not just because
of FOIA or Sarbanes Oxley.  These hot burner issues are also highlighting
the good aspects of VC participation and many entities are investing in
venture capital expecting strong IRR’s. Additionally, the gene
ral public
will become more aware of the “humanitarian side” of venture capital because
of the bridge it provides from innovation to job creation.  And as our
politicians know, it’s all about jobs, jobs, jobs.  Combining the recovering
economy with more available capital, venture is looking to have a strong
year. ”
— Thomas Gephart, Ventana Capital Management, Irvine, CA

On the health of the market:

“We see no evidence of back to bubble period behavior or attitudes in 2005.
Rather, it is a back to the future attitude – really a return to pre-bubble
normalcy. Venture funding will continue to rise in 2005 but VCs are still
understandably cautious. The challenge will be to avoid investing too
cautiously, while maintaining the tenacity and guts it takes to back and
build the market leaders of tomorrow.   So it’s steak, not sushi. Martinis,
not Dom Perignon.”
— J. Sanford Miller and Allan Ferguson, 3i, Menlo Park, CA and Waltham, MA

“In 2005 the venture capital industry should witness a continuation of the
current recovery as public capital markets continue to strengthen and as
buyers of IT equipment and software gradually increase expenditures.  The
venture capital industry’s fund raising and investment pace have now
returned to long-term sustainable levels which will help the outlook for
stronger industry returns.”
— Peter C. Wendell, Sierra Ventures, Faculty Member, Stanford Business
School, Menlo Park, CA.

On availability of capital:

“The number of existing and new firms raising funds that will be put to work
in 2005, coupled with the return of true mezzanine investors anticipating
the coming exit market, will result in an increase in the number of
investments in seed and early-stage companies.  Deal size probably won’t
increase substantially, given that many of these new funds are smaller than
their predecessors, but there will be more cash flowing into the market –
and it will be good news for very young companies.”
— Dennis Dougherty, Intersouth Partners, Durham, NC

“I expect to see a relative increase in the availability of venture capital
in emerging markets over the next five years – spurred by multiple state
fund of fund initiatives in these markets and an overhang of venture dollars
in the top ten markets.” 
— David Mann, Spring Mill Ventures, Bloomington, IN

On VC at a cross roads:

“Virtually all of the returns in the industry over the past 40 years have
come from the Information and Communications Technology (ITC) sector with
capital spending in that sector growing at nearly 3x the rate of GDP growth.
ITC capital spending now represents almost 40% of all capital spending and I
expect it in the future it will it grow at or near the same level as the
GDP. ITC is a mature industry!

Venture capitalists must find new industrial segments which are growing at a
significantly faster rate than the GDP.  Is biotech the answer? Either that,
or we VC’s will have to outperform the GDP through shear brilliance.  If we
don’t, returns for the industry will decline to match other investment
— Bill Stensrud, Enterprise Partners Venture Capital, La Jolla, CA