Why Venture Capital Will Out Perform PE Over The Next 5 Years

Why Venture Capital Will Out Perform PE Over The Next 5 Years CLEARSTO NE V E N T U R E P A R T N E R S Why Has PE done so well this decade? CLEARSTO NE 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 CLEARSTO NE 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 Capital availability 3X to 5X cash flow Trend Direction…. Stable Moderate Shrinking Credit Markets Equity Risk Premium Fund commitments 4 Open Getting more permissive 4% Starting to fall $58B Stable / Shrinking Confidential CLEARSTO NE V E N T U R E P A R T N E R S What are the conditions in early 2008? CLEARSTO NE 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…. CLEARSTO NE 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 7 Confidential CLEARSTO NE 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 8 Confidential CLEARSTO NE 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 Capital availability 8X to10X cash flow Trend Direction…. Falling Enormous More money pouring in Credit Markets Equity Risk Premium Fund commitments 9 Restricted Tightening even further 4% Climbing fast $250B Another $160B waiting to close Confidential CLEARSTO NE V E N T U R E P A R T N E R S 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! CLEARSTO NE 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 CLEARSTO NE 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 CLEARSTO NE V E N T U R E P A R T N E R S So What is Going On In The Venture Markets? CLEARSTO NE 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 CLEARSTO NE 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 Very high Substantial Beginning to tighten $100B – Big Overhand Shrinking # of Active Firms Tracking index – NASDAQ 2198 At a high but going down 4240 Falling rapidly Technology spending 15 Historically High Confidential Dropping quickly CLEARSTO NE 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….. CLEARSTO NE 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 17 Confidential CLEARSTO NE 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 18 Confidential CLEARSTO NE 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 CLEARSTO NE 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 Moderate Adequate Stable $25B Stable but trending down # of Active Firms Tracking index – NASDAQ 989 1/2 of the high & shrinking Stable with IPO market open 2500 Technology spending 20 Stable Confidential Good and rising in some C L E sectors O N E ARST V E N T U R E P A R T N E R S More so than earlier tech cycles, private investors are being rewarded for potential break out value at IPO…. CLEARSTO NE 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 CLEARSTO NE V E N T U R E P A R T N E R S 22 Confidential  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 CLEARSTO NE 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…. CLEARSTO NE 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 CLEARSTO NE 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 CLEARSTO NE V E N T U R E P A R T N E R S Appendix Slides CLEARSTO NE V E N T U R E P A R T N E R S Venture Capital Environment 2000 Versus 2008 2000 Valuations Capital availability Very high Early 2008 Moderate / Stable Wide open Moderate / Stable Fund commitments # of Active Firms $100B – Big Overhand Moderate / Stable 2198 989 Tracking index – NASDAQ Technology spending 28 4240 2500 Steady – rising in some sectors Historically High Confidential CLEARSTO NE V E N T U R E P A R T N E R S Buyout Mezzanine Environment 2000 Versus 2008 2000/2001 Valuations Capital availability 3X to 5X cash flow Early 2008 8X- 10X Moderate Enormous Credit Markets Equity Risk Premium Fund commitments Open Restricted / Closed 3% 4% and rising fast $58B $250B + 29 Confidential CLEARSTO NE V E N T U R E P A R T N E R S