What are Venture Capitalists interested in right now?

By Maureen Aylward

Even though the economy is taking a beating yet again, money is still flowing through venture capital firms to businesses. We asked our venture capital experts on Zintro what they think are the most interesting investments right now.

Michael Felman, a portfolio fund management expert, believes that technology is still a hot area especially cloud computing, search analytics, and financial and business service technologies. “However, the investment trend is toward later stage companies where those companies are profitable. There is a big funding gap between the seed or A-Level and all subsequent levels,” he says

DBodenstein, a lawyer with expertise in venture capital financing, says that industries of particular interest include alternate energy, green tech, and, to a lesser extent, various health care and Internet-based media technologies. However, many people who work with early stage growth companies know that in the wake of the financial crisis the venture capital industry became far more conservative in its investing habits, eschewing the types of early-stage investments traditionally associated with venture capital. Instead, it sought to invest primarily in companies that were a bit further along in their development curves. “We heard things like, ‘We need to see at least $3-5 million in revenue and at least $1 million of EBITDA,’ or ‘We’re looking for companies that can go public in a year or so,’” recalls Bodenstein.

This still holds true in many cases and, in view of the volatility of the public markets over these last weeks, there may be some retrenchment back in that direction. “At a recent venture capital symposium held in New York, the panelists – all representatives of VC firms and/or independent investors – actually started using the word angel in the same breath as venture capital. Angel investments generally refer to investments in earlier stage companies,” Bodenstein reports.

Bodenstein says that the most popular industry mentioned by far was digital media, including social media sites and advertising and mobile media technologies; however, this preference could in part be reflective of the local economic landscape. “Much of the digital media industry has been based in New York, while Silicon Valley has seen more activity in alternate energy and green technologies of various sorts covering everything from recycling and gasification to high-tech building materials. In addition, we are seeing somewhat of a feeding frenzy in the online coupon/group purchasing space. The sector is undergoing a lot of consolidation with startups being swallowed up by pioneers, and the resultant proliferation of quick exit opportunities should hold a strong attraction for equity investors,” says Bodenstein. Other sectors that have been garnering increased attention from VCs are for profit vocational and higher education (both on- and off-line) and cloud computing services and software that improve efficiencies in health care delivery and research.

“Of particular interest are businesses that, either through their development and use of proprietary technologies or through inventive business models, are able to gather vast amounts of data from target markets and audiences,” says Bodenstein. “Thus, entrepreneurs in the social media space are being advised that the volume of traffic their sites attract is a crucial, if not the weightiest determinant used by the investment world in assessing the value of their companies.”

Bodenstein says that the most common theme he sees is an emphasis on offerings that focus on data-gathering and process and facilitation or enhancement development of existing products and services. “You’re likely to get people’s attention with a new software or technology that facilitates and streamlines the research, development, and testing of new drugs than you are with your own new experimental drug,” says Bodenstein. “Perhaps this is due to a perception that it is faster, less risky, and requires less capital investment to develop processes or enhancement technology that is disruptive than it is to develop a truly unique, novel, and disruptive product or service never before available. In any event, though various industries or sectors may fall in or out of favor from time to time, the basic mantra of the true VC remains the same: Ideally, look for truly disruptive and visionary technologies and management teams that can bring them to market and monetize them before losing their competitive advantage to the ensuing stampede.”

Michael Hirschberg, an investment banker, says that venture capitalists are still focused on technology and business services. “Technology’s Web 2.0 bubble has continued to fuel VC investments across various stages with potential to land big returns through both public offerings and buyouts from established firms,” he says. “Outsourcing continues to attract interest, investment, and customers; therefore, business process outsourcers are extremely well-positioned to attract capital and investments in the early and growth stages.”

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