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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

Return

Seed Stage VC Early Stage VC Other Private Equity Flavors

Late Stage VC Est. Pub Equity

T-bonds T-Bills

Risk


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%

2%

% of Total VC Rounds

26%

4%

8% 20%

Restart

80%

35%

36%

60%

Later

24% 33% 20%

22%

40% *49%

Second First

*54%

20% *31%

*38%

Seed

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

Example:

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

Harvested

One Third:

$20 Million

$0

One Third:

$20 Million

$20 Million

One Third:

$20 Million

$160 Million

Totals:

$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 (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)


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