Venture Capital Trends

							1. 2. 3. 4.

The Hot Sectors! The Facts About Exits Sentiment in Ventureland Thoughts on Three Rising Trends

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

Where’s The Biggest Investment Opportunity Today?
Greentech
55%

Internet B2B
23%

Mobile/Wireless
11%

Media & Entertainment
7%

Security
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Poll conducted at AlwaysOn Conference Summer 2007 CLEAR STO N E
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V E N T U R E P A R T N E R S

4%

Anything Else Worth Investing In?
• • • • • •
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Enterprise equipment Telecom services Healthcare services Biometrics Semiconductors Financial services
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Exits: Facts and Myths

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Private Equity: A Potent Force
• 1st half of 2007
– 6 of 10 largest tech M&A done by Private Equity – Europe no exception
• 2 largest: Freescale, Philips Semi

– Pending PE debt issuance
• Jan 06 = $40B • June 07 = $250B
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Field of Acquirers Has Shrunk
• 2006
–40% of all tech M&A above $50M done by 10 companies –Average market cap of acquirers = $100B

Enormous buying power in hands of a few
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Myth #1

The IPO market is back!

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

Tech IPOs Have Become Rarer
1990‟s

20012003

2004 2007

IPOs Per Year

130

20-25

55

Today we have less than half the IPOs of pre-bubble 1990’s
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CLEAR STO N E
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VC Exits above $50M
IPO 1990‟s Past 4 years 60% 10% M&A 40%

90%
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CONFIDENTIAL

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Significant “IPO Premium”
Technology Business Services Healthcare Services

IPO Premium

26%

37%

43%

…and investors enjoy continued upside potential
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2007 versus 1997
• VCs deploying 2.5X more capital versus 10 years ago but…… Same # of exits above $100M 500% Increase in M&A exits 80% decline in IPO exits
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Implications?
• Buyer concentration = continual tough M&A market • No re-population of the buyer base
– Selling our best companies – Mortgaging our future?

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

A Shrinking Buyer Base
• 1640 public tech companies today
– Down 35% from Peak in 2000! – 7 straight years of fewer public tech companies

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Myth #2

The bar is incredibly high for taking a company public….easier to sell the business
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Public Market Facts
• 2/3 of names on NASDAQ are < $500M market cap
– 80% < $1 Billion Market Cap

• Vaunted NYSE?
– Nearly 40% < $1 Billion market cap
• 25% < $500M market cap
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Non Bulge Bracket Relevant
• Bulge Bracket Firms did 25% of Tech IPOs during 80‟s and 90‟s
– 40 to 60 deals/Year – Today do 80% of Tech IPO‟s
• ~ 40 deals/Year

• What about the other 100 deals?
– Many are not getting done…but could
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Small Cap IPOs…Not Just For Jeffries & Co; et.al….

• 1990-1998
• Avg market cap? • Avg raise?

65 tech IPOs $197M $37M

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

Half the IPOs Raise <$100M
<$50M

>$100M

$50 - $100M
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Note: IPOs from QI 2004 - Q2 2007. Source: Dealogic

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Clearly Not Just Tech….

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IPO vs. Sale of Business
Business Services
Number of IPOs 14

Health Care
44

Technology
23

Consumer
10

Financial Services
16

TOTAL
107

Average Enterprise Value

$224.9M

$212.5M

$274.4M

$270.3M

$325.5M

$236.1M

Average LTM EBITDA Multiple

16.8x

24.3x

17.4x

11.6x

17.3x

18.6x

All IPOs between January 1, 2006, and June 30, 2007, where the market cap was less than $300 million...
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Implied EBITDA?

$15.7M

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

Moderate Revenue Bar…
Acme Allot Riverbed ShoreTel Packet Comm Networks Comm
Pre-IPO LTM Revenue

$58M

$32M

$49M

$71M

PeopleSupport = $37M…..Compellent = $38M
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V E N T U R E P A R T N E R S

Not Just Web Companies Going Public…..
• Other Tech IPOs in past 12 months…. –Aruba, Bigband Networks, Infinera, Starent Networks, Veraz, Airvana, Mitel….

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What If…..

…..AT&T bought Cisco for $250M in 1991

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Instead…. • Sequoia chose to take public at a $225M market cap • Good Decision?
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Conclusion?

Let‟s get smart about the Small Cap IPO market……
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Data Analytics: Attractive Economics For Customers and Investors
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Thinking by Numbers
• Goal: turning data into profits • Intuitive and experiencial expertise losing out to number crunching • Still…..statistical analysis faces tremendous skepticism
– threatens information monopoly of experts

• Money Ball effect could help drive acceptance
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Analytics Coming of Age
• Retail
– Video to assess shopping patterns in stores
• Getting people to stay longer/spend more

– Data filtering to lower returns/avoid markdowns

• Web
– Too many to list….

• Consumer Marketing
– Modeling consumer buying proclivity

• Hospitality Industry
– Gary Loveman‟s majic at Harris Casino
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Vintage Wine Price Predictor

• Princeton economics professor wondered…..
– what factors determine wine prices?

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Don’t Need to Drink It….
• Professor speculated that tasters were unreliable • Modeling pinpointed important variables • Most important determinate of vintage quality?
– seasonal temperature – obvious but overlooked
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“Expert” Backlash….
–Wine experts blasted approach • Convinced industry publications not to print it –Gauge has proven far more accurate than experts

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Still Some Work To Do
• Many failed attempts… • Companies burned by unfulfilled promises • Uphill battle to prove efficacy • But companies remain interested….
– Top line boosters > cost reduction tools
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Managed Services: A Trend To Bet On
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Services….Upheaval in the Equipment Space
• New and more effective models emerging
– Department managers controlling more IT spending – IT organizations want to know less and less – Coupling managed service with purchase – Cisco leading charge
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CLEAR STO N E
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Services….More Acceptance From Resellers
• VAR margins down to 10% to 20% • Finally learning to sell services • Europe as a model

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Services = Customer Lock-in
• Services keep customers loyal
– Nokia expects $500M in revenue from SoonR type service in 4 years
• Hopes service will keep users on Nokia platform

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Operational Benefits of Managed Services Model
• No legacy platforms to maintain
• 3000 Microsoft developers maintain Windows 2000

• • • •
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Upgrades pushed out daily Birds eye view of customer behavior Land and expand Much shorter sale-to-revenue cycle
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Service Provider = More Valuable Company
• Acquirers gain immediate leverage
– customers are readily accessible

versus behind the firewall

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Salesforce.com

35,000 Customers 1,000,000 Users

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Software Tools: Not Entirely a Shitty Business
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V E N T U R E P A R T N E R S

Two Honorable Mentions
• Adobe = $25B market cap, 9x rev mult.

• Divx

= $0.5B market cap, 7x rev mult.

Stay clear of niche development environment tools Target consumer friendly apps (i.e Flash, MPEG 4)

Way of playing media & content trend
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Worth a Second Look?
• • • • • Consumer auction site Job boards Services targeting the aging population Virus protection Online banking

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New Fixes to Age Old Problems….Rarely work
• • • • • Verifiable Email Better local Search Improving marketing response rates Targeting the “under-served” SMB Fuel Additives?

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VC Sentiment 2007: What Are We Thinking?

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

Current Beliefs in Venture Land
• Early stage has best return profile • Ad supported businesses scale the best
– Enormous $300 billion spend to tap into!

• Search is the driver of economic activity • Paying up for a hot company is smart • Emerging markets are hot
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Indeed….Search is King
Direct Access
1800 contacts The Street.com WebMD 1800 Flowers Blue Nile The Knot Move.com Netflix FTD Group DrugStore Overstock CNET Monster RealNetworks
As of August 25, 2007

Big 5 Search
68% 64% 63% 62% 60% 55% 53% 50% 48% 48% 47% 46% 45% C 36% R S T O N E LEA
V E N T U R E P A R T N E R S

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8.7% 5.1% 8.6% 8.5% 6.6% 7.6% 4.1% 13.0% 7.2% 10.1% 10.5% 5.9% 7.7% 23.0%
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Positive (but weak) Relationship Between Ad $ and Non Search Traffic
Sales and Marketing Spending as Pct of FY06 Revenue
45%
RNWK

40%
MOVE

35% 30% 25% 20% 15% 10% 5%
CTAC TSCM NILE FLWS WBMD

NFLX

KNOT

CNET MNST REDE FTD

Trend line

PCLN OSTK DSCM

0% 30% 35% 40% 45% 50% 55% 60% 65% 70%

Percentage of Visitors from a Nonsearch-Engine Source
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P&G….The Gold Standard of Advertising Efficiency
12.0% Organic Sales Growth 10.0% 8.0% 6.0%
R-Squared = .84

4.0%
2.0% 0.0%

9.0%

9.5%

10.0%

10.5%

11.0%

Advertising as a % of Sales
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Strong Opinions in Web 2.0 Land…
• Web companies should create open platforms • Users should have access and control of their data • Social features are the future of all consumer web apps • E-tailing is not very interesting
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Have E-Tailers Learned Something Since the Bubble?
2007 YTD Performance Market Cap

Blue Nile Overstock 1800 Contacts 1800 Flowers
51 As of August 25, 2007

129% 36% 42% 61%
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$1.3B $510M $312M $620M
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…And Mobile as Well…
• Mobile apps cannot be monetized with advertising • Mobile start-ups cannot succeed without a carrier deal …and yet ABI Research says mobile advertising will be a $19B business in 2011?
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Opinions Formed About Software….
• SaaS is a superior model in enterprise software

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Heathcare Services…..

Athena Health = $1.1B Market Cap

Trailing Revenues = $75M

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and yet…..

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Just a Few Years Ago….
• You couldn‟t lose …..
– following what big company CIOs said – Landing a „blue chip‟ partner to peddle your products – Investing in „real technology companies‟
• Remember Nano?

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You Can’t Lose With….
• Millions of users! • Successful founders doing it again!
– Mahalo, Joost, Clearwire

• Alternative energy deals! • Paying up for hot deals with traction! • Following Sequoia!
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You Can’t Win….
• • • • In a web deal with limited user uptake Being a „dumb pipe‟ Backing uninspiring founders In the optical, home networking, or tools space • Taking on Ebay or Cisco or _______ • Selling voice services • Owning a small %
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Parting thoughts…

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VCs and Entrepreneurs Seeing Stars
• Iconic examples used to justify lofty valuations in consumer space…
– – – – Facebook Skype YouTube Google

• Enterprise market now has a celebrity too!
– VMWare ~ $22B market cap
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Top 5 Internet Market Cap Leaders
Google + Yahoo + eBay + Yahoo!Japan + Amazon
$32B = Nasdaq trough $325B = market value – 2007
Source: Morgan Stanley
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2007…….Greed > Fear
• Write-offs are rare these days • Mediocre companies getting funded • CVP portfolio no exception….
– Communicado and SoonR perhaps should not have been able to raise money

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Risky to Redline ANY sector….even lowly optical, storage, comm, healthcare services….
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Perseverance Pays….
1982-2001 Compound Annual Return

•All trading days •Minus 10 best days •Minus 30 best days •Minus 50 best days

11.8% 9.0% 5.3% 2.4%

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Note: As of Aug. 22. Sources: Investment Company Institute; Journal of the Academy of Finance; Morningstar. CONFIDENTIAL

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Following The Crowd Doesn’t…
Net Inflow into Real Estate Mutual Funds 2006

$9.4 billion

2007 Return of Real Estate Funds
65

- 8.5%

Note: As of Aug. 22. Sources: Investment Company Institute; Journal of the Academy of Finance; Morningstar. CONFIDENTIAL

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Discussion

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