With Mark Heeson, president of the Venture Capital Association.

Question: Venture capital appears to be making a comeback. Will VC show continued growth in the year ahead?

Heeson: We are seeing a sustainability of the venture investment levels, which have been level at $4-6 billion each quarter for the last 12 quarters. As an industry, we do not want to return to the irrational levels we saw in 1999 and 2000. The market acquisitions of venture-backed companies have improved significantly over the last year in terms of numbers and valuations. The IPO market has also shown signs of recovery, reopening in the last year after a very bleak 2002 and 2003. Many of the companies that survived the technology bubble burst are now emerging as strong, viable entities. Lastly, venture capitalists are fundraising again and that means there will be a new pool of funds to invest in early-stage companies over the next several years. We are expecting the venture capital industry to operate at these healthy levels for the foreseeable future.

Question: Has a merger/acquisition strategy supplanted an IPO as a fund-raising option for many companies, especially in the technology sector?

Heeson: A merger or acquisition has always been the more common exit strategy for a venture-backed company, although IPOs garner more public attention. In 2004, there were 333 acquisitions and 93 IPOs. While the M&A has not supplanted the IPO, the regulatory and market hurdles that companies must now face to go public have reached a level that has caused many companies to pursue a "dual track." The company's registration with the SEC to go public is also a signal that it can be bought. If the company is offered a favorable acquisition price, it may choose to go that route as it is less burdensome than going public.

Question: What are venture capitalists looking for from technology companies?

Heeson: The fundamental criterion for new investments has not changed: a strong business plan, sound management team and an innovative edge. However, we are seeing venture capitalists looking harder at competitive market position as they are less interested in "me too" deals. If we learned anything from the tech bubble burst, it is that we do not need 12 online pet stores. Venture capitalists are looking for first-to-market advantage and breakthrough technologies that will literally change the way we live or work — the next Google or Federal Express. Also, VCs today have a global perspective and are looking for their companies to be internationally driven in terms of markets, employment and competition from the very start.

This article is reprinted with permission from the ITBusinessEdge newsletter Aligning IT & Business Goals.