Time ripe for venture capital

But that's not the case, Mark Heesen, president of the National Venture Capital Association, told fellow VCs at the Demofall 2005 technology conference here.

In fact, Heesen said Wednesday morning, the time is ripe for a new cycle of investment, even if the size of funds has dropped significantly since the bubble burst on the Internet boom.

"There is an awful lot of money trying to get into this industry," he said. But where VCs are talking about how their "last funds might have been $400 million," today's funds might be only $250 million, he said.

Heesen predicted that the venture capital industry is about to go through what he called a "bifurcation." Effectively, he said, where there used to be a plethora of small, medium and large funds, the next generation of funds will likely be either very large--or smaller, $100 million funds focusing on specific technologies or geographic regions.

"Midsize funds are the ones that are getting stuck" without a lot of opportunity, he said.

At the same time, Heesen explained that private funds are finding that they can win over early-stage companies' intent on staying in stealth mode by leveraging the fact that the firms have no investment from public companies. Private funds, he said, can assure young companies that there will be no SEC reporting requirements as a consequence of accepting a deal.

Nevertheless, he told the crowd of VCs, they should expect that in many cases, they will have to walk away from attractive deals because they won't have as much money to invest as in the past. That will mean being more choosy than VCs were during the bubble.

"You are going to see healthy competition," Heesen said. "You're going to have to be much more careful this time."

According to Heesen, several areas offer valuable investment opportunities. Among them: companies that plan to market products or services in China and India.

Yet even as American investors look to China for opportunity, Heesen cautioned that the government there has made it clear that it will not offer much help to funds that take money out of the country. Instead, he explained, China will only assist American VCs who set up offices in China and keep the money they earn there.

He also said life sciences are becoming a growth industry for venture capital.

"Twenty-nine percent of our money is going to life science," Heesen said. "When you look at life science, like personalized medicine and obesity...there is a growing convergence of IT and life science."

In addition, he said the fallout from Hurricane Katrina means Congress will be pushing for the rapid adoption of new technologies that will allow individuals and doctors to more easily access medical records in the aftermath of disasters.

Heesen closed by warning those in attendance to prepare for a period of intense partisanship following the forthcoming vote over Supreme Court Chief Justice nominee John Roberts. This wrangling could affect the regulatory expectations placed on companies trying to go public and make it harder for them to complete initial public offerings in the months ahead, he said.

"We're going to see very mad Republicans out of this vote," he said. "We don't see a lot of hope for substantive change in legislative areas."