Transcript Key Trends Shaping the Rapid Growth of the Venture Capital

The All-Important Ecosystem
1
AGENDA
 Summary
of Funding Sources in the EcoSystem
 Impact on the Economy/Jobs
 Fund Raising and Resources
 Exit Scenario
 Threats and Opportunities
Source: Venture Impact 2009 by IHS Global Insight
2
Many Options to Choose From














Entrepreneur Personal Funds
“Friends and Family”
Personal credit card and other borrowings
Angel investors/Angel networks/Angel funds
Venture capital
Corporate direct investment
Venture leasing
Mezzanine Financing
Merger and Acquisition
Initial Public Offering
Secondary/Follow-on Public Offering
Private Placements – Debt & Equity
Buyout/Acquisition Financing
Corporate Debt
3
What is an Angel Investor?
Individual who puts own private money directly into a
private business (different definitions)
Type of Capital
Accredited?
Portfolio Company
Ownership
Experience of
Angel
ACEF
Equity
Required
Not Family
Wide Variety
Mason/EBAN
Equity
?
?
Management or
Entrepreneur
Debt or Equity
Not Required
Not Family or Friend
Wide Variety
Equity
?
?
?
Shane/SBA
Sohl/CVR/UNH
4
Angel Groups are Small - but Important - Subset
of All American Angels
U.S.
Millionaires
4,200,000
Informal
Investors
3 study
estimates
1,000,000
Active
Angels
Center for
Venture
Research
225,000
Investors
in Angel
Groups
12,000
2009 Report from Spectrem: $1 millionaires down in 2008 27%, those with $5 million down 28%
World Wealth Report (Capgemini): 19% drop in HNWI and 22.8% drop in wealth in 2008
5
Why Angel
Networks/Funds

Group of individual angel investors that
recognize the value in the Power of Mindshare
 Aggregating
investment dollars
 Aggregating knowledge, experience
 Aggregating industry connections
 Collective Due Diligence




Mitigate Risk - Diversified portfolio
Higher Quality Deal Flow
Greater Investment Clout – Strength in numbers
Continuity through Portfolio Management
6
Growth in Number of American Angel Groups
300
250
200
150
100
50
0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Sources: Center for Venture Research (pre 03 data) and Kauffman Foundation/ACEF (04-09 data)
7
Number of Investors
Funding Gap
Seed
GAP
Venture Capital
Investment (one round)
Stage
Pre-Seed
Source
Friends
and
Family
Lone Angels
And
Incubators
$25,000 to
$100,000
$100,000 to
$1,000,000
Investment
Seed / Start-Up
$10MM
$5MM
Early Stage
Funding Gap between
$1,000,000 and
$3,000,000/$5,000,000
(depending on region)
Expansion
(Launch)
Later
(Growth)
Venture Capital
$3,000,000 and up
8
VC Ecosystem
XYZ Ventures (“GP”, “Mgt Co”, “Manager”)
XYZ Fund #1
LPs
1996
Early Stage IT
$200M
Companies
5-8+ yrs
Exits
Distrib to LPs, GPs
9
VC Ecosystem – One Venture Firm
XYZ Ventures (“GP”, “Mgt Co”, “Manager”)
XYZ Fund #1
LPs
1996
XYZ Fund #2
LPs
1999
XYZ Fund #3
LPs
2003
Early Stage IT
Early Stage IT
Early Stage IT
$200M
$400M
$300M
Companies
Companies
Companies
5-8+ yrs
5-8+ yrs
5-8+ yrs
Exits
Exits
Exits
Distrib to LPs, GPs
Distrib to LPs, GPs
Distrib to LPs, GPs
10
Billions
US Venture Capital Investment in
Perspective Assets Under Management
$18,000
$16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
$16,700
US GDP is $12.5 Trillion
Venture capital
= 0.2% of US
GDP
$4,777
$2,000
NYSE Mkt
Value
$800
Equity Mutual Hedge Funds Buyout Funds
Funds
(Est)
$179
Venture
Capital
Source: AIMA, Investment Company Institute, NYSE.com, Thomson Reuters, NVCA
11
Funding by Source and Stage- 2009
15,000
US$ Millions
12,500
4,672
10,000
7,500
1,596
5,511
5,000
2,500
Sources:
Center for
Venture
Research and
PwC
MoneyTree
Venture Capital
Angels
8,272
5,912
6,160
2,640
528
0
Seed
Early
Expansion
Later
Investment Stage
Angel Investors 2009
• $17.60 billion
• ~57,000 deals
• 35% seed/startup
• 47% early stage
• ~ 259,500 individuals
Venture Capital 2009
• US$ 17.69 billion
• ~2,800 deals
• 9% seed/startup
• 65% later/expansion capital
• Total 794 firms (not all active)
12
The Economic Impact of Angel
and Venture Capital on the US
Economy ...
It’s Not Just Deals and Exits!
So how do we measure the
results?
13
Global Insight Study

In 2008, venture backed companies:
 Provided
12.05 million US jobs
 Had sales of $2.9 trillion

Represents 20.5% of GDP
 Still




dominated venture-created sectors
74% of telecommunications jobs
81% of software jobs
55% of semiconductor revenue
67% of electronics/instrumentation revenue
Source: Venture Impact 2009 by IHS Global Insight
14
Kauffman Foundation Study


Companies that benefited from Angel
Investors: Alcoa, Home Depot, Google,
Amazon (few examples)
Such companies are less than 1% of all
companies but generated 10% of new jobs
15
JOB CREATORS
From 1980 to
2005… firms less
than five years old
accounted for all
net job growth in
the United States.
SBA: Business
Dynamics Statistics
Briefing
16
Job Creators
Source: Business Dynamics Statistics Briefing: Jobs Created from
Business Startups in the United States.
Census Bureau and Kauffman Foundation, January 2009
17
Venture Capital Investment
is Productive ...



For VC every dollar invested in 1970-2001, there was
$9.88 in US revenue during 2008
For every $24,564 of venture capital invested in 19702001, there was one job in the year 2008
Note these ratios are based on investment through 2001 ($296B)
because investment after that time has likely had little effect on jobs and
revenues. If investment 1970-2008 ($456.2B) is used, the ratios would
be $6.28 and $38,606 respectively
Source: Venture Impact 2008 by IHS Global Insight
18
Questions & Answers
19
Fundraising & Resources
20
AUM peaked at $276B, now $179B;
# Firms down from 1023 peak to 794
Source: NVCA 2010 Yearbook prepared by Thomson Reuters
21
Economic Cycles Impact Both
Angel Investments
 $19.2B in 2008
 $26B in 2007
 $25.6B in 2006
 $21B in 2005
 $22.5B in 2004
 $18B in 2003
 $15B in 2002
UNH Center for Venture Research
VC Investments
 $28.3B in 2008
 $29.4B in 2007
 $22B in 2006
 $21.5B in 2005
 $21.5B in 2004
 $19.4B in 2003
 $21.4B in 2002
PWC Moneytree
22
Investment Marches On Rumors that the Venture Industry
has stopped investing are greatly
exaggerated
23
VC Investment Peaked in 2000;
2008 Was Down 8%; 2009 was $18B
$120,000
$103B
$ Million Invested
$100,000
$80,000
$60,000
$28B
$40,000
$20,000
2009
1Q10
2006
2007
2008
2004
2005
2002
2003
2000
2001
1997
1998
1999
1995
1996
1993
1994
1991
1992
1988
1989
1990
1986
1987
1985
$0
$18B
Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report,
Data: Thomson Reuters
24
Industry Investment is in a Smaller
Size Band than 2002-mid2008 Period
$10
$5
$0
Total VC $B
3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10
5.9
5.8
6.3
7.1
6.6
6.3
7.3
7.3
7.7
8.0
7.7
7.4
7.1
5.9
3.4
4.1
5.1
5.2
4.7
Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data: Thomson Reuters
25
First time venture fundings: The Industry is
smaller but still funded 755 in 2009
3,500
3,000
2,500
2,000
1,500
1,000
500
-
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1Q10
First Fundings 1,140 1,291 1,412 2,439 3,365 1,219 831
760
929 1,038 1,233 1,331 1,232 755
208
Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report,
Data: Thomson Reuters
26
Economy Affects ACA Member
Investment in 2009
Average Number of Investments Per Group
2007
7.3
2008
6.3
2009
6.3
PRELIMINARY DATA: ACA Confidence Survey, March 2010
Self reported data, not verified, still collecting data
27
Range of Performance
Data: Fenwick & West
Quaterly Survey
Valuations in Silicon Valley
100%
Down
Flat
Up
Percent
80%
60%
40%
20%
0%
Q1’06 Q2’06 Q3’06 Q4’06 Q1’07 Q2’07 Q3’07 Q4’07 Q1’08 Q2’08 Q3’08 Q4’08 Q1’09 Q2’09 Q3’09 Q4’09
Source: Fenwick & West Quarterly Surveys
Increases
in valuation (up rounds) dominated
until the economic meltdown
Equilibrium
being restored?
28
The Exit Scene the importance of acquisitions
has become clear over the past
several years
29
300
A Capital Crisis?
Few IPOS Post-Bubble; Many
Good Companies in the Wings
250
200
150
100
50
0
# IP O s
1999
2000
2001
2002
2003
2004
2005
2006
2007
1Q 08
2Q 08
3Q 08
4Q 08
1Q 09
2Q 09
3Q 09
4Q 09
Y T D1
0
270
264
41
22
29
93
56
57
86
5
0
1
0
0
5
3
4
14
Source: Thomson Reuters/National Venture Capital Association
30
What’s in the IPO Pipeline?
Dismal Short Term…
Don’t confuse “uptick” with “recovery”…
80
60
40
20
0
3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 YTD
IPOs Done
12
31
5
0
1
0
0
5
3
4
14
In Reg on last day
72
60
37
42
38
28
26
10
18
29
45
Source: Thomson Reuters/National Venture Capital Association – Updated 4/23/2010
31
% of Known M&A Exits
Those Few Acquisitions Which Do
Happen Are Generally Awful
100%
80%
60%
40%
20%
0%
>10x TVI
4x-10x TVI
1x-4x TVI
< TVI
1Q09
2Q09
3Q09
4Q09
1
2
3
8
2
3
2
5
2
7
2
11
7
10
9
8
Source: Thomson Reuters/National Venture Capital Association – Undisclosed txns are prorated
32
Why aren’t portcos being snapped up?
Sure we could keep buying small companies
and G.E.-ize them. But we've learned that
it's better to partner with the #3 company
that wants to be #1 than to buy a tiny
company or go it alone
Jeffrey Immelt
CEO of GE quoted in PostAmerican World
33
Venture Exit Counts- IPOs and M&A
by Year - 2008 is Dismal!
700
M&A
IPO
Number of Issues
600
500
400
300
200
100
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
M&A
74
100
97
116
164
209
240
317
353
319
284
346
351
370
360
335
262
IPO
220
166
202
270
136
77
260
264
41
24
29
93
56
57
86
6
12
Source: Thomson Reuters/National Venture Capital Association
34
Angels are fine with M & A
160Quarterly
PE Exits by Corporate Acquisition, IPO and Secondary Sale
143
140
120
109
101
Deal Count
100
95
80
Percentage of capital invested by industry
60
52
43
40
40
26
20
0
1Q
2Q
3Q
2005
4Q
1Q
2Q
3Q
4Q
1Q
2006
Corporate Acquisition
2Q
3Q
2007
IPO
4Q
1Q
2Q
3Q
2008
4Q
1Q
2Q
3Q
2009
Secondary Transaction
35
4Q
Performance
36
Venture Capital Returns: Still Around
20% over the long haul net to the LPs
Period Ending
1 Qtr
1 Year
10 Year
20 Year
09/30/2009 (Current)
2.3%
-12.4%
8.4%
23.1%
03/31/2009 (6 mos ago)
-2.9%
-17.5%
26.2%
22.5%
12/31/2008 (Prior)
-12.5%
-16.5%
35.0%
22.3%
DJIA
15.8%
-7.4%
1.6%
9.2%
NASDAQ Composite
17.7%
1.5%
-2.5%
7.8%
S&P 500
15.6%
-6.9%
-0.2%
8.0%
Through Q3 2009
Source: Cambridge Associates U.S Venture Capital Index®, the
performance benchmark of the National Venture Capital Association
37
A Word About Return Expectations

Angel investing is VERY risky
 1 or 2 of every 10 investments brings most
 Hard to tell which companies will return

Current return estimates for portfolios:
 Annual


of return
IRR of 27% - 2.6X in 3.5 years*
If business gets VC funding later, angel
investment is often diluted
Some really great angels therefore looking for
10 to 30X potential
 Wide
variety of expectations, depending on mix of
motivations to be an angel

Correct valuation is critical
*Source: Rob Wiltbank, Willamette University, November, 2007 paper
38
Threats and Opportunities….
The Crystal Ball?
39
“Buy low… sell high” is easier if you
really buy low!
Company
Cisco
eBay
Amazon.com
Apple
YouTube
Google
JetBlue
WebVan
Total Venture
Investment $M
Recent Market Cap/
Acq Price $M
[1/2009]
3
7
8
9
12
40
173
441
89,760
16,460
20,550
71,450
1,650
90,610
1,710
0
Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data: Thomson Reuters
40
Key US VC building blocks ...
Our Ecosystem!

Capital formation




Prudent man rule – enabled pension investment
LP laws
Capital gains tax reduction
Empowered entrepreneurs

Capital gains tax reductions
 Stock options/team building tools
 Reasonable bankruptcy laws





Protect companies – IP laws
Abundant customers willing to do business with SMEs
Exit markets – the NASDAQ
Face-to-face investing/proximity
Cultural acceptance
41
Key Policy Issues for Angels – and the
Entrepreneurs They Invest in

Senate Financial Reform Bill

1,300 page bill with two problem paragraphs
 Increase accredited investor definition for inflation
 Repeal Federal preemption of state regulation over “accredited
investor” securities offerings

Federal Tax Credits for Angels


ACA consulted on two of three bills being drafted
Obama Administration Stimulus (Reduce taxes
on QSBS)

Increase Qualified Small Business Stock exemption to 100% and
extend it to more years.
42
Questions & Answers
43