December 19, 2006 7:52 AM PST

VC bets for '07: Energy, Internet, Asia

Despite the lack of a clear payout strategy, venture capitalists intend to plow money into energy, Internet and companies outside the United States, according to an industry survey.

The National Venture Capital Associations (NVCA) on Monday published the results of a survey of 200 venture capitalists, conducted earlier this month, which indicates investment plans for the coming year.

Venture capitalists said start-ups in hot sectors will continue to attract dollars. VCs also expect to see more competition from other investment classes, such as hedge funds.

Investment in energy-related companies was projected to increase by more than 90 percent, while Internet and media-related investments are expected to climb about 70 percent.

VCs surveyed showed a great deal of interest in overseas markets, with more than 90 percent of respondents saying they plan to increase investment in China and India. Other regions of increased interest included additional Asian countries and Eastern Europe.

The level of venture investing is expected to stay at roughly the same level as the past two years. Almost 70 percent of respondents expected VC investing to total between $20 billion and $29 billion in 2007. The year 2005 saw $27 billion invested, and investments during the first three quarters of 2006 totalled $25.4 billion.

"The 2006 investment momentum in sectors in need of or receptive to such changes, including energy, Internet and media/entertainment, will accelerate next year. Additionally, if the venture-backed IPO (initial public offering) market in the U.S. doesn't begin to open in 2007, the VC industry will begin to leverage alternative markets and buyers for their portfolio companies," said Mark Heesen, president of the NVCA, in a statement.

The initial public offering market, where venture capitalists and start-up companies historically earned a cash return on their investments, has not been an attractive option in the United States for the past few years.

As a result, many venture capitalists are relying on mergers and acquisitions as an "exit strategy," with 78 percent of respondents calling acquisitions the exit of choice.

However, more than half of venture capitalists in the survey expect U.S.-based firms to consider using public markets overseas next year as an exit. Also, 71 percent of those surveyed said that private equity firms will be a more attractive option next year.

VCs also indicated that they expect to see increased competition, with 48 percent of respondents expecting the number of venture capital firms to go down.

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