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Overview of the US Venture Capital Industry

Warren Haber ( 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

T-bonds T-Bills


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



8% 20%







24% 33% 20%


40% *49%

Second First


20% *31%



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?

* VentureSource

How Early Stage Venture Capitalists Make Money


$60 Million Fund (Net of mgmt. fees) Invested


One Third:

$20 Million


One Third:

$20 Million

$20 Million

One Third:

$20 Million

$160 Million


$60 Million

$180 Million

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 (

Global Venture Capital Survey: Ernst & Young Global Venture Capital Survey 2008-2009 ($file/SGM_VC _Global_corporate_survey_2008_2009.pdf)

Article on Limited Partners Prefer Emerging Markets: Almeida Capital LP Survey (

US Venture Capital Statistics: PriceWaterhouse MoneyTree Reports (

Venture Capital Industry Trends: “Watching the Alpha Geeks” by Tim O’Reily (

Venture Capital Gossip: VentureBeat (, Venture Wire Alerts (, PE Hub Wire (

Venture Capital “Boot Camp”: “How to Raise Venture Capital” Video by Warren Haber (

Venture Association of NJ: “How to Get a VC Excited About Your Business” PowerPoint by Warren Haber (

Overview of the U.S. Venture Capital Industry (in English)  

Fund Deployment  Duration: 10 yr. life, 5 yr. deployment, 5 yr. harvest.  Majority of venture funds focus on Preferred Equity investments....

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