THE VENTURE FINANCE ECOSYSTEM
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Transcript of THE VENTURE FINANCE ECOSYSTEM
THE VENTURE FINANCE ECOSYSTEM
Michael Danaher
Wilson Sonsini Goodrich & Rosati
October 2004
2
1. So Goes Nasdaq...
2. The New Economies Continue
3. What’s with Valuations?
4. What’s with IPO’s?
5. The LP Glut
6. The Coming Crisis
3
1. So Goes Nasdaq...
4
The Venture Ecosystem Food Chain
Nasdaq
LPs
Portfolio Companies
OPEX CAPX
GPs
5
So Goes Nasdaq... FUND INFLOWS
Source: “Venture Capital Industry Overview,” VentureOne, October 2004
Fu
nd
s R
aise
d (
$B)
$7.1$8.7$12.9
$49.3
$81.2
$55.5
$25.7
$15.9$12.1
$7.3$5.7$6.7
$0
$20
$40
$60
$80
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 1H04
$14.2*
Source: Bloomberg, Nasdaq 1992-2004
* Annual projection
6
So Goes Nasdaq... FUND OUTFLOWSA
mo
un
t In
vest
ed (
$B)
Nu
mb
er of D
eals
$20.8*
2002*
$10.4
$18.4$21.6
$36.1
$94.5
$49.4
$17.9$13.1
$9.2$6.4$4.4$3.6
1001
20242307
3221
6262
4563
25432211
1912
13151075959
$0
$25
$50
$75
$100
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 1H04
0
1,000
2,000
3,000
4,000
5,000
6,000
Amount Invested ($B) Number of Deals
Source: “Venture Capital Industry Overview,” VentureOne, October 2004
* Annual projection
Source: Bloomberg, Nasdaq 1992-2004
7
So Goes Nasdaq... LIQUIDITY EVENTS
$43.41
$98.56
$22.08
$11.03 $13.03$18.09
$3.25$10.11
$26.80
$12.81 $14.87
$0.00
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 YTD04*
YTD04 = 1Q04 – 3Q04
661
329
354399
424
554
233
306
413352
321
Ag
greg
ate # of M
&A
/IPO
Ag
gre
gat
e V
alu
e ($
B)
Source: “Venture Capital Industry Overview,” VentureOne, October 2004
* YTD04: 1Q04-3Q04
Source: Bloomberg, Nasdaq 1992-2004
8
2. The New Economies Continue
9
New Economies ContinueRun Silent, Run Cheap
Continued frugality in the portfolio companies
Continued productivity gains - more with less
Outsourcing to India and China became a torrent
• WSGR setting up 1 Indian sub a week
10
Me
dia
n A
mo
un
t In
ve
ste
d (
$M
)
$10.0$10.0
$14.4
$8.0
$9.0
$5.1 $5.0
$1.0$1.5
$0
$2
$4
$6
$8
$10
$12
$14
2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04
Later Round Second Round First Round Seed Round
Deal Size Remains Constant
Source: “Venture Capital Industry Overview,” VentureOne, October 2004
11
3. What’s with Valuations?
12
Median Pre-money Valuation by YearM
edia
n P
re-m
on
ey V
alu
atio
n (
$M)
$13.6
$10.0$10.5
$16.0
$25.5
$21.5
$15.5
$12.9$11.1
$9.3$10.0$8.2
$0
$5
$10
$15
$20
$25
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 1H04
Source: “Venture Capital Industry Overview,” VentureOne, October 2004
13
Median Pre-money Valuations by RoundM
ed
ian
Pr e
-mon
ey V
alu
ati
on
($
M)
$0
$10
$20
$30
$40
$50
2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04
Later Rounds Second Round First Round Seed Round
$25
$45
$15
$18
$5
$8
$3$3
Source: “Venture Capital Industry Overview,” VentureOne, October 2004
14
The View From the Ground
More deal competition, more bidding wars
More up-rounds
More eyebrow-raising rounds
15
WSGR Venture Financing
* Top 5 avaerage, top 2 values
Quarter
Average Value of Top 10 Deals
(by Pre-Money Valuation)($m)
Top 3 Deals (by Pre-Money Valuation)
($m)
Q303 $42 $77; $66; $47
Q403 $46 $90; $65; $60
Q104 $63 $115; $112; $60
Q204 $46 $82; $72; $60
Q304 $59 $125; $125; $100
10/4/2004* $44 $100; $70
16
4. What’s with IPO’s?
17
Number of IPO’s
*YTD04: 1Q04-3Q04
Am
ou
nt
Rai
sed
($B
)V
entu
re-Backed
IPO
s
$1.6 $1.4
$3.8
$1.8
$19.2$19.5
$3.7$4.6
$8.7
$5.0
$2.8
48
222022
202
250
68
120
216
144
115
$0
$5
$10
$15
$20
$25
$30
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 YTD04*
0
50
100
150
200
250
Amount Raised ($B) Venture-Backed IPOs
Source: “Venture Capital Industry Overview,” VentureOne, October 2004
18
IPO’s vs. M&A
0% 20% 40% 60% 80% 100%
1995
1996
1997
1998
1999
2000
2001
2002
2003
YTD04*
IPOs M&As
*YTD04: 1Q04-3Q04
Source: “Venture Capital Industry Overview,” VentureOne, October 2004
19
Why the Decline?
Public market profitability requirements
Perceived volatility vs. M&A security
Sarbanes burden
Decreased research coverage
20
Earnings Matter More
YearPercent profitable
in IPO year
1999 49%
2000 9%
2001 31%
2002 30%
2003 100%
2004 60%
The WSGR IPO Universe
21
5. The LP Glut
22
The LP Glut
Portfolio companies are staying frugal
GP’s are staying frugal—fund sizes remain down
But
LP’s
• Increasing fund investments in proportion to public market
• Increasing percentage allocation to VC asset class
= Global Warming in the Venture Ecosystem?
23
The LP Glut
“Why Venture Funds Don’t Want Your Cash”
-N.Y. Times
“Too Much Money Chasing Too Few Good Funds”
-Venture Capital Journal
24
The LP Glut
The Fishing Fleet Example
Fleet profitability
Gill nets and trollers
New fishing grounds
25
New Fishing Grounds
China and India
Domestic
Energy/Clean tech
26
6. Crisis in the Making?
27
Crisis in the Making?
Global technology competition is increasing rapidly
• Funding
• Talent
• Activity
Historically, the U.S. competes by attracting the best and brightest from around the world
28
Crisis in the Making?
The Department of Homeland Sabotage
Foreign applications to graduate school down one-third!
Visa process discouraging visits by foreign students and businessmen
Work visa limitations reducing high tech talent