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

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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

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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

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Confidential

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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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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….

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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

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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
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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 +

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Confidential

CLEARSTO NE
V E N T U R E P A R T N E R S