THE VENTURE FINANCE ECOSYSTEM Michael Danaher Wilson Sonsini Goodrich & Rosati.
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Transcript of THE VENTURE FINANCE ECOSYSTEM Michael Danaher Wilson Sonsini Goodrich & Rosati.
![Page 1: THE VENTURE FINANCE ECOSYSTEM Michael Danaher Wilson Sonsini Goodrich & Rosati.](https://reader036.fdocuments.us/reader036/viewer/2022081501/56649e8f5503460f94b92cb4/html5/thumbnails/1.jpg)
THE VENTURE FINANCE ECOSYSTEM
Michael Danaher
Wilson Sonsini Goodrich & Rosati
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1. Venture Funding Activity
2. Demand Side Dynamics
3. Supply Side Dynamics
4. Dealing with Deflation
5. Other Trends and Fashions
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1. Venture Funding Activity
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The View From on High:Investment Rises Slightly in 2Q’03
Am
ou
nt
Investe
d
($B
)N
um
ber o
f Deals$4.4
$5.7$5.8$7.6
$4.4 $3.5
$7.6$9.3$11.0
$19.2
$23.0$24.8
$26.9
$4.0
442
1786 1713
1427
1239
878801
723 710
563 594530
469 424
$0
$10
$20
$30
$40
2Q00 4Q00 2Q01 4Q01 2Q02 4Q02 2Q03
0
300
600
900
1,200
1,500
1,800
Amount Invested ($B) Number of Deals
Underlying data available in VentureSource
Source: VentureOne/Ernst & Young
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The View From the Ground
Consumer confidence in the venture industry moved strongly up in the Spring
Multiple term sheets – what a concept!
Some instances of valuation giddiness
Overall activity is sharply up
First round deals are up
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2. Demand Side Dynamics
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Confidence is Up
The Market has awakened
1200
1300
1400
1500
1600
1700
1800
1900
2000
J anuary-03 April-03 J uly-03 October-03
Nasdaq Composite Index
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Confidence is Up
0
10
20
30
40
50
60
2001 2002 2003* 2004*
S&P 500 EarningsPer Share
The economy has awakened
Source: Bloomberg & Zachs Investment Research
* Estimated Earnings
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Confidence is Up
The world is adjusting to life after 9/11
The Iraq war ended quickly
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Venture Fund Dynamics:The Clean-up is Mostly Done
In 2001 & 2002 VCs were preoccupied with the care of their existing portfolio
Now that most of the the triage is complete, VCs can focus on investing again
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$2.4
$13.2
$48.8
$83.8
$55.7
$25.7
$16.6$13.2
$6.7$5.6$6.6$3.1
$0
$20
$40
$60
$80
$100
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 IH03
Fu
nd
s R
ais
ed
($
B)
Commitments to Venture Capital Funds
Underlying data available in VentureSource
Source: VentureOne/Ernst & Young
Venture Fund Dynamics
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Nu
mb
er o
f Deals
Source: VentureOne/Ernst & Young
$7.5
$20.3
$35.4
$93.9
$49.2
$17.8$13.1$9.9
19012198
2520
4502
6165
3112
2156
866
$0
$25
$50
$75
$100
1996 1997 1998 1999 2000 2001 2002 1H03
0
1,000
2,000
3,000
4,000
5,000
6,000
Amount Invested ($B) Number of Deals
Underlying data available in VentureSource
Venture Fund Inflow and Outflow
$2.4
$13.2
$48.8
$83.8
$55.7
$25.7
$16.6$13.2
$6.7$5.6$6.6$3.1
$0
$20
$40
$60
$80
$100
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 IH03
Fu
nd
s R
ais
ed
($
B)
Am
ou
nt
Investe
d
($B
)
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Source: VentureOne/Ernst & Young
Underlying data available in VentureSource
Venture Fund Inflows and the Nasdaq
$2.4
$13.2
$48.8
$83.8
$55.7
$25.7
$16.6$13.2
$6.7$5.6$6.6$3.1
$0
$20
$40
$60
$80
$100
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 IH03
Fu
nd
s R
ais
ed
($
B)
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Negative Dynamics
A number of “fair weather funds” are drying up
Many top funds have downsized
Corporate investors are mostly gone
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Corporate Investment is Mostly GoneA
mou
nt
Investe
d
($M
)
Underlying data available in VentureSource
Source: VentureOne/Ernst & Young
$130$142$129$106$242$253
$1,491$1,618
$1,928
$60 $104 $206 $49 $22
70
48
100
41
2429
120
135
2516 15 14 13 7
$0
$500
$1,000
$1,500
$2,000
1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03
0
25
50
75
100
125
Amount Invested ($M) Number of Deals
(except Intel and Cisco)
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First Round Financings
0
500
1000
1500
2000
2500
3000
3500
1997 1998 1999 2000 2001 2002
Series A Deals
Data extrapolated from VentureSource
Source: VentureOne/Ernst & Young
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Negative Dynamics
The Ex-Smoker Syndrome: the Reformed VC
• Excessively risk averse
• Excessively slow
• Excessively LP conscious
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3. Supply Side Dynamics
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“The older but wiser girl is the girl for me.”
-- The Music Man
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The Entrepreneurs
More realistic about valuations
More patient about building a company, and building a career
More down-to-earth
More plentiful
More hard core technology plans
More thrifty
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4. Dealing With Deflation
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The Old Days of the New Economy
The market rewarded
•First to market
•Scale (e.g. engineer head count)
•Revenue prospects
Earnings didn’t matter
•The rational response: go fast, spend big, never mind the losses
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Earnings Really Didn’t Matter
Year OfferingsPercent profitable
in IPO year
1999 47 49%
2000 66 9%
2001 13 31%
The WSGR IPO Universe*
(Company and Underwriter Side)
* An unofficial compilation
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Exit Valuations Are Now Earnings Driven
IPO’s Require Profits
Acquirers want accretive acquisitions
•No big premiums for “time to market”
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The Venture Industry Responds:Valuations Remain Down
Med
ian
Am
ou
nt
Investe
d (
$M
)
Underlying data available in VentureSource
Source: VentureOne/Ernst & Young
$6.7$6.2
$4.3$0.8
$0
$5
$10
$15
$20
$25
2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03
Later Round Second Round First Round Seed Round
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The Venture Industry Responds:Deal Size Remains Down
Med
ian
Am
ou
nt
Investe
d (
$M
)
Underlying data available in VentureSource
Source: VentureOne/Ernst & Young
$100
$17
$39
$14
$5
$13
$3$5$0
$20
$40
$60
$80
$100
1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03
Later Rounds
Second Round
First Round
Seed
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The Entrepreneurs Respond:Run Silent, Run Cheap
Smaller budget business plans
Lower headcount, smaller salaries, cheaper facilities, leased equipment, smaller marketing budgets…
Focus, do less, outsource
Aim right—sell, design, build
Overseas Design Centers
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The Entrepreneurs Respond:Run Silent, Run Cheap
Some great businesses are being built on $200k to $300k per month
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5) Other Trends and Fashions
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Proceed With Caution
Show me the customers
Almost every deal is syndicated
More first round deals are traunched
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Other Deal Terms
Often smaller shares for founders (especially outside Silicon Valley)
Investors prefer plain vanilla deals when possible
•No cumulative dividends, weighted average anti-dilution
•Liquidation preferences: usually 1x participating preferred, often without caps
•Redemption rights (but why bother?)
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Market Dislocations
Fewer dislocations (un-served sectors) than years past
•Most will consider first round, second round and mezzanine
•Seed rounds are still a problem – the angel market is still decimated
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Market Dislocations
Out of fashion
•Optics
•Telecom services
In fashion
• Network security, homeland security (government sales!), wireless, consumer electronics, biotech