Why Venture Capital Will Out Perform PE Over The Next 5 Years
CLEAR STO N E
V E N T U R E P A R T N E R S
Why Has PE done so well this decade?
CLEAR STO N E
V E N T U R E P A R T N E R S
PE Salad Days of 20002007…
Massive
liquidity in the economy
17 rate cuts by the fed 2000 to 2004 Low equity risk premium
Attractive
public market valuations post
bubble Permissive lending environment Smaller PE funds, less capital available…. and less competition
CLEAR STO N E
V E N T U R E P A R T N E R S
Buyout Mezzanine Environment 2000
Economic Situation Year 2000 / 2001 Valuations
3X to 5X cash flow
Trend Direction….
Stable
Capital availability
Credit Markets Equity Risk Premium Fund commitments
4
Moderate
Shrinking
Open
Getting more permissive
4%
Starting to fall
$58B
Stable / Shrinking CLEAR STO N E
V E N T U R E P A R T N E R S
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What are the conditions in early 2008?
CLEAR STO N E
V E N T U R E P A R T N E R S
PE Environment Today
markets virtually shut down…. Will eventually re-open but….
Debt
ultra favorable conditions of recent years will not return soon
Massive
un-invested capital overhang….
CLEAR STO N E
V E N T U R E P A R T N E R S
Buyout & Mezzanine Fundraising Has Increased 8x Since 2003
Buyout & Mezzanine fundraising up 29% through 3Q07, versus 2006
*2007 figures are based on actuals through 3Q07 and estimates for 4Q07 Source: DowJones VentureSource, Buyouts Magazine, Clearstone analysis
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CLEAR STO N E
V E N T U R E P A R T N E R S
VC Fundraising – and Performance Dropped Significantly After Similar 8X Increase
Source: DowJones VentureSource, NVCA
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CLEAR STO N E
V E N T U R E P A R T N E R S
Buyout Mezzanine Environment 2008….Troubling
Economic Situation 2007 / Early 2008 Valuations
8X to10X cash flow
Trend Direction….
Falling
Capital availability
Credit Markets Equity Risk Premium Fund commitments
9
Enormous
More money pouring in
Restricted
Tightening even further
4%
Climbing fast
$250B
Another $160B waiting to close CLEAR STO N E
V E N T U R E P A R T N E R S
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Signs of Problems Ahead…
Leveraged
buyouts require robust credit
markets
That existed the past 7 years…but no longer
regulators giving greater scrutiny to leveraged lending practices No takers for leverage loan participations
Banking
Banks hold nearly $300B of debt needing to be sold!
CLEAR STO N E
V E N T U R E P A R T N E R S
Classic Buyout Candidates Under Pressure….
Mature
companies in mature markets
Retail, Manufacturing, Materials, Financials
do we well in slowing economy…signs already evident Shrinking cash flows restrict leverage potential…. Defaults rising….driving lenders to demand higher risk compensation
CLEAR STO N E
V E N T U R E P A R T N E R S
Don’t
PE Firm Behaviors Driving Returns Lower….
increases in # and size of PE funds Aggressive deal pricing
• From 5X to 8-10X cash flow multiples
Large
Strong
incentives to deploy capital rather than return it Rising % of exits from inter-firm sales
• 2007: 60% of PE exits done through sale to another PE firm
CLEAR STO N E
V E N T U R E P A R T N E R S
So What is Going On In The Venture Markets?
CLEAR STO N E
V E N T U R E P A R T N E R S
The decade began on a high note… but quickly evolved into extraordinary difficult times
CLEAR STO N E
V E N T U R E P A R T N E R S
Venture Capital Environment 2000
Economic Situation 2000 / 2001 Trend Direction…
Starting to fall
Valuations
Capital availability Fund commitments # of Active Firms Tracking index – NASDAQ Technology spending
15
Very high
Substantial
Beginning to tighten
$100B – Big Overhand
Shrinking
2198 4240
At a high but going down Falling rapidly
Historically High
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Dropping quickly CLEAR STO N E
V E N T U R E P A R T N E R S
Conditions have improved considerably helped by a reduction in capital and firms…..
CLEAR STO N E
V E N T U R E P A R T N E R S
Venture Capital Fundraising
Venture Capital fundraising down 11% through 3Q07, versus 2006
*2007 figures are based on actuals through 3Q07 and estimates for 4Q07 Source: DowJones VentureSource, Buyouts Magazine, Clearstone analysis
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CLEAR STO N E
V E N T U R E P A R T N E R S
Only The Strongest Firms Survived The Post-Bubble Shake-Out
Median Fund Size increased 2x – $100MM in 2000 versus $200MM in 2006
Source: DowJones Venture Capital Industry Report 2007
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CLEAR STO N E
V E N T U R E P A R T N E R S
Attractive Conditions Ahead…
Venture
capital fund commitments flat for past 3 years
contra-indicator
Early
stage valuations stable… public market appetite for growth
while late stage and IPO valuations growing
Strong
stories
Recent IPOs in the enterprise and consumer services sectors well received
CLEAR STO N E
V E N T U R E P A R T N E R S
Venture Capital Environment 2008
Economic Situation 2007 / Early 2008 Trend Direction…
Stable in most sectors
Valuations
Capital availability Fund commitments # of Active Firms Tracking index – NASDAQ Technology spending
20
Moderate
Adequate
Stable
$25B
Stable but trending down
989 2500
1/2 of the high & shrinking Stable with IPO market open Good and rising in some C L Esectors O N E ARST
V E N T U R E P A R T N E R S
Stable
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More so than earlier tech cycles, private investors are being rewarded for potential break out value at IPO….
CLEAR STO N E
V E N T U R E P A R T N E R S
More Value Accruing to Venture Investors at IPO
- $ Billions -
Earlier Tech Cycles
*Facebook Pre-Money IPO valuation rumored to be greater than $50B
New Tech Cycle
CLEAR STO N E
V E N T U R E P A R T N E R S
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Companies are able to hit critical mass faster
Why Are Early Stage Companies Capturing More Value?
Impact of Internet, new communication technologies, leveraging managed services
Addressing global opportunities earlier in their life cycle
From 300M to 2.5 billion consumers
Sourcing gains from China and India Capital markets much better informed
More willing to factor in growth potential
CLEAR STO N E
V E N T U R E P A R T N E R S
It’s a very attractive market for early stage investing….particularly in the enterprise and consumer markets….
CLEAR STO N E
V E N T U R E P A R T N E R S
Extremely Favorable Trends in the Enterprise Sector
Post
bubble IT austerity has reached practical limits
Major upgrades needed to replace outdated computing and communication systems
• Wireless networks – Meru, Divitas • Digital archival and storage – Kazeon, Mimosa
Web
and digital media opportunities require new technology investments
• Content monitization – eForce, Rubicon
CLEAR STO N E
V E N T U R E P A R T N E R S
Compelling Enterprise 2.0 Venture Opportunities
Managed
services
• Unified communications monitoring – Communicado • Mobile network access - SoonR
Predicative
analytics and decision support
systems
• Real time analytics for IT networks - Integrien
CLEAR STO N E
V E N T U R E P A R T N E R S
Appendix Slides
CLEAR STO N E
V E N T U R E P A R T N E R S
Venture Capital Environment 2000 Versus 2008
2000 Valuations
Very high
Early 2008
Moderate / Stable
Capital availability
Fund commitments # of Active Firms Tracking index – NASDAQ Technology spending
28
Wide open
Moderate / Stable
$100B – Big Overhand
Moderate / Stable
2198 4240
989 2500 Steady – rising in some sectors CLEAR STO N E
V E N T U R E P A R T N E R S
Historically High
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Buyout Mezzanine Environment 2000 Versus 2008
2000/2001
Valuations Capital availability Credit Markets Equity Risk Premium Fund commitments
3X to 5X cash flow
Early 2008
8X- 10X
Moderate
Enormous
Open
Restricted / Closed
3%
4% and rising fast
$58B
$250B +
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CLEAR STO N E
V E N T U R E P A R T N E R S