Overview of the US Venture Capital Industry
Warren Haber (WHaber@Verizon.net) March 31, 2009
Topics Venture Capital Described How Does A Venture Fund Work Capital Sources and Structure US Industry Statistics Recent European Statistics How Early Stage Venture Capitalists Make Money Investment Criteria Global Meltdown Venture Capitalist’s Interest In Emerging Markets Appendix of Useful Links
Venture Capital Described
Seed Stage VC Early Stage VC Other Private Equity Flavors
Late Stage VC Est. Pub Equity
How Does A Venture Fund Work Fund Formation General Partners form a team and write a Private Placement Memorandum. Market fund to Limited Partners (Pensions, Endowments, High Net Worth’s). Typically fund has a 2% Management Fee and 20% Carried Interest. Fund Deployment Duration: 10 yr. life, 5 yr. deployment, 5 yr. harvest. Majority of venture funds focus on Preferred Equity investments. General Partner has “fiduciary obligation” – structures appropriate protections. Fund Management General Partners often seek Board Representation but each uses it differently. Fund invests in 10 – 50 initial investments with follow-on in roughly onethird. General Partner permitted to raise new fund three to five years into current fund.
Capital Sources and Structure Professionally managed pool of money - blind, illiquid, SEC-exempt Corporations, institutions and high net worth individuals Long-term perspective providing high-risk / high reward Professionally managed investments in young firms with big potential Themes and flavors Sector – life sciences, information technology… Stage – seed, early stage, later stage… Geography – mid-Atlantic, Silicon Valley… Long-term partnerships with entrepreneurs Pre-profit or even pre-revenue new company formation Grow companies through $ (syndication) and board Focused on creating value hopefully recognized at exit
US Industry Statistics 100%
% of Total VC Rounds
24% 33% 20%
0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 *Seed and First Rounds Combined
Source: Dow Jones VentureSource
Recent European Statistics* European Venture Deals – Slowed dramatically in 2008 1,107 deals in 2007. 882 deals in 2008. 38% drop in venture invested.
European Venture Dollar $2.1 billion in Fourth Quarter 2007. $1.3 billion in Fourth Quarter 2008. 38% drop in venture invested. European Venture Sectors Drop in IT Drop in Healthcare Surge in Energy and Utilities. European Energy and Utilities Investments 2007: $431 million in 52 deals. 2008: $816 million in 59 deals. Focus on later stage/larger investments to mitigate risk?
How Early Stage Venture Capitalists Make Money
$60 Million Fund (Net of mgmt. fees) Invested
Investment Criteria • Industry which is poised for explosive growth or disruption. • Underlying Intellectual Property or Processes which enable company to secure and sustain #1 market position. • Extraordinary growth potential with a clear catalyst. • Ability to grow business with minimal incremental costs. • Capital efficiency.
Global Meltdown Direct Impact on Venture Capital Value Chain: 1. Pensioners/Universities – Erosion of principal capital due to dramatic declines in value of Public Equities. 2. Managers of Pensions/University Endowments (“Limited Partners”) – Public Equity declines caused massive over allocation to “Alternative Assets” (includes venture) causing major portfolio “re-allocation”. 3. Venture Capital Managers (“General Partners”) respond to uncertainty – Reduce amount of follow-on capital and new investments. Also raising “annex funds”. 4. Entrepreneurs – Less venture capital available for new and follow-on investments.
Venture Capitalist’s Interest In Emerging Markets •
Summary Points from recent KPMG Survey (see appendix) –
KPMG Survey revealed continued bullishness on emerging markets.
US Firm’s are continuing to staff up operations abroad.
India, China & Central/Eastern Europe are clearly the most interesting areas with other emerging markets experiencing diminished interest.
“China and India were the overwhelming favorite destinations for investment chosen by 29% and 23% of respondents, respectively”.
“Seeing continued convergence between private equity and venture capital.”
Appendix of Useful Links •
Global Venture Capital Trends: 2008 Deloitte Global Trends in Venture Capital Survey (http://www.deloitte.com/dtt/cda/doc/content/us_tmt_globalvc_062408.pdf)
Global Venture Capital Survey: Ernst & Young Global Venture Capital Survey 2008-2009 (http://www.ey.com/Global/assets.nsf/International/SGM_VC_Global_corporate_survey_2008_2009/$file/SGM_VC _Global_corporate_survey_2008_2009.pdf)
Article on Limited Partners Prefer Emerging Markets: Almeida Capital LP Survey (http://www.vccircle.com/node/4445/pdf)
US Venture Capital Statistics: PriceWaterhouse MoneyTree Reports (https://www.pwcmoneytree.com/MTPublic/ns/index.jsp)
Venture Capital Industry Trends: “Watching the Alpha Geeks” by Tim O’Reily (http://www.slideshare.net/timoreilly/cio-exchange08-presentation)
Venture Capital Gossip: VentureBeat (http://venturebeat.com/), Venture Wire Alerts (http://www.venturewire.com/register.aspx), PE Hub Wire (http://www.thomsonreuters.com/products_services/media/pe_hub_wire)
Venture Capital “Boot Camp”: “How to Raise Venture Capital” Video by Warren Haber (http://www.centernetworks.com/startups-venture-capital-advice)
Venture Association of NJ: “How to Get a VC Excited About Your Business” PowerPoint by Warren Haber (www.vanj.com/warrenhaber.PPT)