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Emerging_Industry_Overview_Venture_Capital_Firms

VIEWS: 1 PAGES: 13

									 
    Emerging Industry Overview: Venture Capital Firms
    Gale Emerging Industry Overviews
    2011


 
 




   Title:         Emerging Industry Overview: Venture Capital Firms
   Source:        Gale Emerging Industry Overviews
   Issue:         2011
 




Emerging Industry Overview: Venture Capital Firms

Industry Snapshot

With the glossy sheen still coating the dot-com business model, venture capital (VC) firms in the late 1990s achieved
enormous returns and were among the primary beneficiaries of the inflated technology bubble of the period. But when the
market bottomed out, these companies found themselves with scads of money lost to investments that would never pan out. At
one time, the venture capital industry, one of the more glamorous sectors of finance in the late 1990s, cooled in a hurry
following the declining technology sector--its bread and butter--in the early 2000s, which ushered in three straight years of
losses after decades in the black. Still strong and extremely influential, however, the industry proceeded with greater caution
and foresight than in its earlier carefree glory years, when firms threw enormous sums of money behind startup firms with no
serious plan for long-term viability.

Venture capital is the equity invested in rapidly growing companies that investors believe hold excellent potential for future
earnings. Venture capital firms thus fund enterprising startup companies trying to get off the ground. Concentrated particularly
heavily in high-tech industries, venture capital is generally pooled by institutions or deep-pocketed individuals in the hopes of
generating huge profits over the long term. Thus, venture capital firms are often exactly the financial break young, struggling
entrepreneurs need to get their companies on their feet. However, during uncertain economic times, as in the volatile early
2000s, many venture capital firms had shifted their focus to more developed companies, preferring businesses that were
expected to deliver returns sooner rather than later.

Organization and Structure

Once the exclusive perch of the extremely wealthy, the venture capital industry drifted ever closer to the mainstream through
the 1990s and early years of the first decade of the 2000s, largely as a direct result of the Internet explosion. Major
corporations and financial institutions increasingly forged their own venture capital wings or subsidiaries. Meanwhile, the major
venture capital firms helped established organizations develop Internet-based companies. While still quite prohibitive owing to
the lack of liquidity and long-term orientation, venture capital was drawing more average investors into the fold. On the other
hand, the tremendous success of venture capitalists has shifted the industry dynamic 180 degrees. Gone are the days when
eager opportunists would crawl, hat in hand, to venture capitalists seeking money. Nowadays, venture capital firms are
scrambling to differentiate themselves amidst all the competition and the robust marketplace.

The venture capital industry is served by the National Venture Capital Association (NVCA). Established in 1973, the NVCA
examines the intersection of the venture capital industry and the overall U.S. economy and facilitates the practice of funneling
private equity to new business development. Two major research firms, VentureOne and Thomson Venture Economics, also

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supply information and analysis about the venture capital industry.

Most venture capital firms are private partnerships managed by small professional staffs or closely-help corporations. Venture
capital firms derive their capital from pension funds, endowments, foundations, sympathetic non-financial corporations, banks,
insurance companies, governments, foreign investors, rich uncles, and the venture capitalists themselves. Through the 1980s
and up to the mid-1990s, pension funds provided about half of all money for venture capital (VC) funds. That proportion was a
primary casualty of the massive VC boom of the late 1990s, however, as individual investments jumped to 19 percent of the
total VC pool. Foundations provided an additional 18 percent and non-financial corporations kicked in 13 percent.

The majority of venture capital firms are independent of other financial institutions, although a growing number are subsidiaries
of commercial and investment banks, a trend that accelerated following the passage of the Financial Services Modernization
Act of 1999. Other firms are affiliated with non-financial corporations seeking to diversify their assets.

According to the NVCA, venture capitalists typically devote themselves to financing emerging companies that promise fast and
lucrative growth; purchase equity securities; help companies develop new products and bring them to market; engage in high-
risk, high-reward financing; and maintain a long-term orientation. Although in recent years venture capital deals have grown
larger, VC firms usually sprinkle a little money here and there among a great number of businesses, and then actively work
with the companies' management teams over the long term to help bring the business plan to fruition and generate strong
returns on their investments. The firm then pools all its company investments into a single fund, thereby limiting the company-
by-company risk.

Investment portfolios also vary widely. Some venture capital firms are generalists, investing across industries and company
types. Others specialize in certain industries or even industry segments, geographic regions, or companies of certain types,
such as those in the late stages of development. High tech industry constitutes the overwhelming bulk of venture investment,
but VC firms are spread far and wide, according to the NVCA, helping companies in industries from business services to
construction, and firms with special characteristics, such as those that constitute socially responsible investment.

There are several different stages of company development for which a venture capital firm may provide financing. The
formative stage involves getting the initial idea off the ground, from a solid plan on paper to an actual firm with a structure and
a basis of operation. Formative stage companies pull in the largest share of venture financing, about 42 percent of the total.
Investment at this stage is known as seed financing, the most common type of funding people think of when they consider
venture capital. A company receiving seed financing generally has yet to become fully operational and probably has a product
in development. Early-stage investment takes place when a company is well into its life cycle, perhaps looking to complete a
current project or achieve new breakthroughs. Generally, early financing is directed at companies with a test or pilot product.
Expansion financing fuels the renewed growth or widened reach of a product already on the market. The expansion stage
calls for funding to push a well-grounded company to the next level of viability.

Eventually, of course, a venture capital firm wants to realize a profit from its financial and management investment and will try
to cash out. Once a venture-backed company gets on its feet, the most common financing step is to announce an initial public
offering (IPO), the proceeds of which may be used to cash out the venture capital firm. This is not always the case, however.
Some venture capital firms opt to stay in the game following the IPO, occasionally even forging a presence in the public
company's management. Still, such guidance is not the main thrust of venture capitalists, who seek their fortunes primarily in
moving companies out of the gestation process. Venture capital firms may also throw money behind a proposed merger and
acquisition to facilitate the smooth consolidation of promising firms.
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Another pillar of the venture capital industry is the VC "angel," who generally provides early financing to especially risky
companies-- those that are very young or that have poor financial histories. VC angels prepare a company for an IPO by
providing the funds necessary to develop a new product or complete a key acquisition that will make the company viable for
the public market. A VC angel will usually take a management position for as long as his/her money is invested. Angels are
usually individual investors, a re-emerging sector of the industry, willing to devote both finances and management expertise to
a struggling startup.

Background and Development

While the practice of finding wealthy individuals or organizations to finance one's endeavors probably dates back, in its various
forms, to the earliest days of commerce, the modern venture capital industry emerged slowly from a tiny investment pool in the
1960s, with venture capital gradually evolving into a significant asset class. Prior to the 1960s, the venture capital industry was
basically a number of tremendously wealthy individuals looking to make their mark funding innovative new companies.
Particularly since World War II, the venture capital industry has constituted the financial fuel for high tech industry, and has,
according to Dow Jones venture capital investment data provider VentureOne, financed entire new industries such as
biotechnology and overnight shipping, almost single-handedly bringing to life such current giants as Apple, Microsoft, Intel,
Genentech, and Netscape.

Still, venture capitalists have had a bumpy road on their way to the mythic success of the late 1990s. One of the most notable
busts occurred in the early 1990s, when the slate of much-hyped biotechnology companies failed to live up to inflated
promises, proving a washout at the IPO stage.

The overall annual rates of return are subject to massive fluctuations, from as little as zero percent in off years such as 1984
and 1990 to 60 percent in good years such as 1980 and 1995, with the average usually hovering around 20 percent, although
the late 1990s saw record returns of 85 percent.

The CIA Infiltrates the VC Market

Venture capitalists fund the innovative companies of tomorrow, helping to bring to market the products that will change the
average consumer's life for the better. But that's not all they do. With the announcement that the U.S. Central Intelligence
Agency (CIA) would establish its own venture capital firm, In-Q-Tel, everybody's favorite conspiracy theory target launched its
very own high tech investment scheme. The name wraps the word "intelligence" around the letter "Q," the name of the
purveyor of James Bond's high tech gadgetry. In addition to its cute pop culture nostalgia, the name signifies a certain reality.
One of the firm's primary functions is to fund startup tech companies developing products for use in the CIA's vast spy and
analyst networks. Beyond that, the CIA simply wants the best high tech gear that money can buy, including powerful search
engines, language translation software, and even the ability to roam around the Internet in secret. The agency thus intends to
transform the methods by which it gathers intelligence.

In this case, the government acted as the VC angel. Congress funneled $61 million to the nonprofit firm to get it on its feet,
though skeptics were in abundance on Capitol Hill. Still, the program seemed to be generating some good business. In-Q-Tel's
portfolio contained eight companies late in 2000, from small startups such as Graviton Inc. to such longtime government clients
as Lockheed Martin Corp.

One of the CIA's first ventures fueled the growth of Silicon Valley software company PDH Inc., aimed at the development of
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technology capable of tracking and controlling the movement of digital information. The federal government was keeping a
curious eye on In-Q-Tel. Should the venture capital firm prove to be successful, other departments and agencies could follow
suit, in effect altering the interaction of government and business. The U.S. Postal Service and the National Aeronautics and
Space Administration were contemplating similar business models.

In the meantime, In-Q-Tel made investments in several companies, including Browse3D, a Virginia enterprise that enables
Web surfers to view several pages at once in virtual rooms that show what lies behind links, and Graviton of La Jolla,
California, which makes networks of tiny sensors that communicate with each other and relay information to a user-friendly
computer interface. Potential users include convenience stores needing to monitor refrigeration units. In the early years of the
first decade of the 2000s, In-Q-Tel received about $30 million per year to spend on investments and technology analysis. All
profits go right back into operations.

Obviously, the events of 11 September 2001 had a significant impact on In-Q-Tel's direction. The organization felt a more
urgent need to invest in developing technologies. In addition, the U.S. government's revitalized commitment to homeland
security and defense would provide investment opportunities for companies producing appropriate technology. Post-9/11
investments included Stratify, one of the few companies that could find significant pieces of "unstructured data" (information
dispersed throughout organizations in word processing files, e-mails and databases) and reassemble them in an
understandable fashion. In-Q-Tel invested several million dollars in Stratify in 2001. Stratify's technology was of particular
interest because the CIA needed to process enormous amounts of intelligence information more quickly. Similarly, In-Q-Tel
invested $1 million in Tacit Knowledge Systems of Palo Alto, California, which has the ability to scan e-mail to determine which
individuals in an organization have potentially helpful expertise that someone else should know about. In-Q-Tel also invested
at least $1 million into Senturia's San Diego-based Mohomine, which makes software that gathers and categorizes information
spread across various kinds of documents. Such technology can assist the CIA in monitoring overseas radio, newspaper and
Internet reports.

In 2002, Gilman Louie, president and CEO of In-Q-Tel, appealed to information technology (IT) experts throughout corporate
America to help the CIA's IT warriors access the best technology. Heading into the post-9/11 world, In-Q-Tel was especially
interested in data and knowledge management systems due to an information overload. Louie's plea indicated that the CIA and
In-Q-Tel were ready to work more openly with the private sector. In-Q-Tel was especially interested in companies that develop
remote sensing technology or smart devices that attach to data collection tools such as meter readers. Such technology, Louie
indicated, may prevent a situation such as someone entering an airport with a bomb in his shoe.

Venture Capital's Glory Years

In the late 1990s and the early years of the first decade of the 2000s, venture capital basked in its most glorious era, drawing
new players and new money at a fantastic pace while generating record returns. About 100 new venture capital firms cropped
up in 1999, bringing the U.S. total to over 600. While some of the euphoria surrounding venture capital, which emboldened
herds of individual investors and corporations to participate in VC funds, was a bit overstated, the industry certainly had
enjoyed good times. According to the National Venture Capital Association, venture capital funds investing in early stage
companies generated returns of 85 percent in 1999. The Standard & Poor's 500 (S&P 500) Stock Index, meanwhile, posted a
15 percent increase over the same period. Over a five-year period, the difference was less dramatic but still clearly tilted in
favor of venture capital with 45 percent returns on early stage ventures compared with 28 percent gains for the S&P 500.



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Indeed, the venture capital industry closed out the twentieth century with a bang, greatly accelerating investment to a total of
$36.4 billion in 1999, easily the most lucrative venture year on record, and outpacing the combined totals of the previous three
years, according to VentureOne. The number of venture capital financings leaped 51 percent that year, while the total dollar
amount behind those deals grew 155 percent. A total of about 4,000 companies received venture capital funding in 1999, up
from about 2,900 the year before, while average funding rose from $5.2 million to $8.9 million.

Meanwhile, 248 venture-financed companies completed initial public offerings (IPOs) in 1999, according to VentureOne,
bringing in $19.43 billion and doubling the record set in 1996 when the first wave of Internet companies hit the public market
en masse. The median valuation of these IPOs also took off as well in 1999, reaching $316.6 million from $169.6 million in
1998. Venture capital also financed a total of 256 merger and acquisition deals in 1999, nearly tripling the totals for 1997 and
1998 for a total of $39.18 billion.

The central development behind the massive late 1990s flow of dollars into start-up financings was the Internet. Venture-
backed Internet companies alone rode their way to viability on $25 billion in venture capital in 1999, four times the 1998 total.
Thus, Internet startups accounted for a whopping 69 percent of all venture capital investment in 1999 compared with 43
percent the year before. The other booming industries propping up venture capital investment in 1999 were
telecommunications and networking segments such as fiber optics, representing 21 percent of all VC investment at $7.6 billion.

In addition to traditional venture capital firms, major commercial banks increasingly assumed a venture capital demeanor,
tripling their venture capital investment to over $4 billion between 1996 and 1999 with no sign of a letup. One of the most
attractive aspects of venture capital for banks is the boost in returns relative to loan interest that has accompanied the massive
startup boom of the late 1990s. Amidst weakening bank stocks, the skyrocketing returns on venture investments have taken
on greater importance as banks struggle to remain viable in their rapidly consolidating industry.

The industry through this period also experienced a massive influx of average investors into venture capital, indicative of the
"can't miss" reputation the industry had acquired. While such investors still tend to be concentrated among the wealthier
segments of the investing population, this trend has further relieved the super rich of their monopoly over venture capital. Not
surprisingly, this new demographic changed the face of the industry somewhat. While venture capital firms typically stay in for
the long haul, not expecting any significant returns for about five to seven years, the late 1990s technology and Internet boom
popularized the industry with a number of new players with a lot less patience.

With a strong U.S. economic climate, ecstatic news stories about the New Economy, and the explosion of Internet dot-com
startups, the venture capital industry was at its most robust in early 2000, with few signs of a letup save for analysts' prescient
concerns over the long term stability of the Internet business model. And with a soaring stock market inviting all sorts of get-
rich-quick seekers, investors fell over each other to throw money at the next great dot-com idea. However, the downturn in the
technology markets in 2000 served as a painful reminder to venture capitalists that there was no such thing as a sure thing,
and many players were ushered out of the game as quickly as they had entered. While hardly wiping out the venture capital
industry, these events nonetheless injected some humility, forcing many to recall that fundamentals still mattered in a dot-com
world.

Reality Sinks In

The enthusiasm in the changed industry reached fever pitch when VCs raised $130 billion between the third quarter of 1999
and the end of 2000. Then the bottom dropped out and technology stocks collapsed. In the second quarter of 2001, VC firms

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only invested $11.2 billion, which fell well below the $27 billion average per quarter invested from April 1999 through October
2000. With the sudden slump of the technology sector, venture capital lost some, though by no means all, of its luster.
Between April 1999, when the NASDAQ first started to fall, and the end of the year, nearly 20 VC funds of over $1 billion
closed. According to research firm Thomson Venture Economics, for the year ending March 31, 2001, the value of U.S.
venture funds fell 6.7 percent. It was the first time the industry experienced a 12-month negative return.

The industry realized it lost its sense of perspective during the boom years and had chased after any idea with fistfuls of
dollars. Investors forgot the basic wisdom that only one in ten startups really have a chance of succeeding. Instead, they were
looking to achieve success by throwing money at a new idea. Essentially, they were reawakened to the reality that not
everything is going to fly.

VC Starts to Rebound

Veteran venture capitalists came back from the experience a great deal shaken, but a good deal wiser. With less abundant
investment opportunities, coupled with dramatically weakened returns on the investments that were made, the key word again
became fundamentals. VC firms recovering from the shakeout promised a more conservative approach. Steering clear of firms
soiled by excessive hype or overvalued Internet-based investments, fundraisers were looking to smaller market capitalization
and more comprehensive business plans.

Fundraising finally began to pick up again in late 2003. The fourth quarter of 2003, for instance, saw venture capital firms raise
nearly $5.16 billion, the best intake since the third quarter of 2001 and a 250 percent increase over the same period in 2002.
The pace of venture-backed mergers and acquisitions likewise accelerated at the end of 2003. That year, according to
Thomson Venture Economics and the National Venture Capital Association, 289 companies financed with venture capital were
acquired for a total of $7.7 billion.

Such activity was especially important to the VC industry in the early years of the first decade of the 2000s, since, with the
pool of initial public offerings run comparatively dry, mergers and acquisitions were one of the primary means of liquidity.
VentureOne noted that the number of "restarts," or restructured financial transactions, also rose in 2003 to a seven-year high:
venture capitalists put $1.1 billion into 114 of those deals. Finally, VentureOne reported that restructured financial
transactions, another key source of industry liquidity, rose to their highest level in seven years in 2003, finishing that year with
114 venture-backed deals totaling $1.1 billion.

Although the vast majority of VC money in 2003 was funneled into later-stage investments, the industry began to look with
interest again at startup companies for the first time since the tech bubble burst, even if those emerging companies received
months' worth of intensive examination before receiving their venture financing. Reflecting the conservative industry mood, in
the year and a half ending June 2003, just one-fifth of all U.S. venture deals were for early-stage financing, according to
Thomson Venture Economics, representing the lowest proportion since 1977. In the three decades ending 2003, early-stage
investments represented 34 percent of the total venture capital pool. Information technology remained the leading recipient of
venture funding in 2003. That year, IT companies claimed 63 percent of all VC disbursements, according to Thomson
Financial's Venture Capital Journal, with life sciences firms placing a distant second with 27.7 percent or $4.89 billion.

Despite the modest turnaround, however, there was still reason for caution. ThomsonVenture Economics reported total
industry annual returns at negative 27.4 percent in 2003 and three-year returns at negative 20 percent. The industry included
113 funds raising about $10.8 billion, putting the industry at about the level of 1995. Moreover, the industry was more

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consolidated than ever. While those 113 funds represented a massive decline from the 629 venture capital firms that raised
$105.4 billion in 2000, by 2003 just five companies accounted for nearly one third of all funding. Continuing the turnaround,
venture-backed firms in 2005 reached a median valuation of $15.2 million, $3 million more than in 2004 and the highest in the
past four years. While valuation for health care companies dropped $1.3 million in 2005 to $40.2 million, later stage IT
companies rose nearly $8 million to $30.3 million.

A popular style of investing in the 1980s was corporate venturing, also called "direct investing," and it began coming back by
2005. While the typical venture capital goal is investment return, corporate venturing considers corporate strategic objectives
as well as financial considerations. Also, corporate venture programs usually invest their parent's capital; other venture
investments use outside investors' money.

Media and entertainment companies became the benefactor of VC investments in growing numbers in 2006. The first quarter
saw $396 million committed, compared to $275 in the same quarter of 2005. MovieBeam, a video-on-demand provider, was
the recipient of entertainment's largest deal, with $52.5 million invested by Intel Capital, Norwest Venture Partners, and the
Walt Disney Co., along with others. With $1.2 billion invested in the first quarter of 2006, the software industry was the
beneficiary of the largest number of venture capital deals.

A company in Detroit, Oracle Capital Partners LLC, was the first venture capital firm in the state of Michigan to focus on
minority-owned businesses. Oracle officially opened for business in March 2006, after having raised $10 million to be used
solely for minority-owned businesses, mainly in Southwest Michigan. To close out its first round of fundraising, Oracle hoped
to raise enough from financial institutions and pension plans to become a top venture capital firm in the state. The largest such
firm in 2006 was EDF Ventures of Ann Arbor, with $170 million under contract. According to Oracle's managing director, David
Morris, "Minorities are an underserved niche." Of the $200 billion to $250 billion of venture capital invested in U.S. companies,
only $4 billion to $5 billion are owned by minorities. Oracle intends to mainly invest in established companies that have
demonstrated good leadership.

The Money Tree Survey, released in January 2006, reported that "late-stage"biotechnology, technology, and software sectors
were the investment of choice for Colorado's venture capitalists. That survey agreed with one released the same week by
accounting firm Ernst & Young, which stated that 75 deals in Colorado in 2005 totaled $612 million (most of which were late-
stage businesses), up from $413 million in 2004, but still down from $633 million in 2003, and 2001, which had $1.3 billion in
venture capital deals.

New York venture capitalists began hitting the fundraising trail in early 2006 in one of the strongest attempts in years to refill
treasuries depleted during the internet boom. Most have been knocking on the doors of pension funds and other investors to
raise investment capital to finance their plans to invest in local technology startups in the areas of media, online advertising,
and health care, to name a few. Milestone Venture Partners, a Silicon Alley venture capital firm, had invested in 12 tech
startups since 2002 and had only enough capital to do three more deals before its $13 million bank account emptied. In 2005,
New York VC firms raised $3.1 billion, almost three times their total in 2002. Even so, that total is small compared to the glory
days of the Internet boom in 2000, which saw fundraising efforts bring in $21.8 billion.

A few impressive successes in VC investing reignited investors' interest; for instance, Yahoo bought Del.icio.us, a social
networking Web software firm, for $17 million and the online marketing firm, Bigfoot, was bought out by a large rival for $120
million in September 2005--a huge win for Hudson Ventures. With successes such as these becoming more frequent, VC firms
were starting to reestablish images that had been badly tarnished in 2000.
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By late 2008, the venture capital industry was shifting. Although the number of funds in the third quarter of that year decreased
by 29 percent compared to the same period in 2007, the dollar value increased 6 percent. Mark Heesen, president of the
National Venture Capital Association, said in a 13 October 2008 press release, "The third quarter fundraising statistics reflect
the already anticipated trend that is likely to be pervasive in the coming year--fewer firms raising larger funds."

Fewer deals were being made in the merger and acquisition (M&A) segment of the industry as well. As of October 2008, 199
M&A deals had been completed for a total disclosed dollar value of $11.2 billion, down from 359 deals worth $28.4 billion in
2007. Most of the M&A activity in late 2008 was occurring in the information and technology sector. In the third quarter of
2008, 38 of the 56 deals that were made involved information and technology companies. Within that sector, computer
software and services held the number-one spot in terms of number of companies targeted.

In 2008 the value of the average M&A disclosed deal was $154.3 million, which was not far from the average size in 2007 of
$177.5 million. The statistic that was causing the most concern among many in the industry was the number of IPOs in 2008--
only six, as compared to 86 in 2007. In other words, only six venture-backed companies went public with their first sale of stock
in 2008. The National Venture Capital Association called the situation "a capital markets crisis for the start-up community."

Despite the downturn in the economy and the low numbers in the industry, some remained optimistic. Said Tracy Lefteroff of
Pricewaterhouse Coopers, "Venture capitalists have slugged through difficult economic times before, and this one should be
no different."

Current Conditions

In 2009, there were approximately 794 venture capital firms in the United States, cumulatively managing approximately $179
billion in investment funds. The average venture fund size was $151 million. That year, according to the National Venture
Capital Association, venture capitalists invested roughly $18 billion in nearly 2,400 companies. (Thomson Financial reported
that venture capitalists invested $17.7 billion in 2,795 deals.) While 2009 was a year of overall investment declines (mostly
double-digit), there was a two percent increase in seed stage financing, reflecting a little more confidence in the future
entrpreneurial market.

The networking and equipment industry category suffered the least decline in investment, but even so, experienced a five
percent decline in dollars in 2009, according to 2010 PricewaterhouseCooper National Venture Capital Association Report
Data provided by Thomson Financial. Again in 2009, the software category remained the largest in terms of deals, but was the
second largest, behind the biotechnology category, in terms of dollars. In 2009, venture capitalists invested $3.5 billion into
406 biotechnology deals and $3.1 billion in 619 software deals. The third largest category was in medical devices, with $2.5
billion going into 309 deals. Even clean technology experienced a significant decline, with just $1.9 billion going into 185 deals.
Mergers and acquisitions (M&A) transactions dropped to 262 for the year.

By region, Silicon Valley (CA) attracted the most venture capital in 2009. The top three regions, Silicon Valley, New England,
and the New York Metro area, accounted for almost 60 percent of venture capital dollars and 52 percent of reported deals in
2009. California was the top state to attract funding, followed by Massachusetts, New York, and Texas.

The most active venture firms in 2009, according to Thomson Financial, were New Enterprise Associates, Kleiner Perkins
Caulfield & Byers, and Polaris Venture Partners. The 2009 Venture Impact Study, produced by IHS Global Insight, found that
companies which were originally venture-backed accounted for 12.1 million jobs and more than $2.9 trillion in revenue in the
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United States (using 2008 data).

The first quarter of 2010 was off to a good start, according to CB Insights's quarterly newsletter. For that first quarter, venture
capitalists invested $5.8 billion in 731 companies, representing a significant improvement over the first quarter of 2009, with
just $3.9 billion invested in 483 deals. Back in the game were green/clean technologies, jumping 55 percent in deals and 134
percent in dollars from the fourth quarter of 2009. New York and Massachusetts companies were beginning to close the gap
with California in attracting new venture capital. In just the first quarter of 2010, there were eight venture-backed initial public
offerings (IPOs) and signs of increasing M&A activity as well.

Industry Leaders

Kleiner Perkins Caufield & Byers (KPCB), based in Menlo Park, California, has been a leading financial fuel provider to Silicon
Valley. Since the company's inception in 1972, KPCB has supported hundreds of entrepreneurs in building over 475
companies, featuring such blockbusters as AOL, Compaq, Genentech, Netscape, Google, Juniper, Sun Microsystems, and
Lotus. One of the firm's biggest dot-com success stories is its bankrolling of Amazon.com, Inc. By 2008 the company had about
100 companies in its portfolio. KPCB focuses its investments in four areas: information technology, life sciences, pandemic
and biodefense, and green technology. In 2009, Kleiner Perkins was the leader in cleantech funding and was expected to
complete 2010 with the same distinction. It was also an investor in two of 2009's top ten deals, for Silver Spring Networks Inc.
and Pacific Biosciences, Inc. Its 2010 deals included the start of a social fund with Amazon, Facebook, Shazam, and Zynga,
launching a $250 million sFund at Facebook and placing its money on the U.S. virtual goods market for 2011.

Benchmark Capital Management became the first venture capital firm whose assets exceeded $1 billion, reaching that
benchmark in 2000. The firm derived about one third of its investment pool from individuals, including its own partners. Also
based in Menlo Park, California, Benchmark was another Silicon Valley giant, was an early financial backer of the hugely
successful online auction company eBay Inc., and gave hefty backing to the Sunnyvale, California, networking Web site
Friendster. Benchmark generally spent $3 million to $5 million in seed investments but also delved in at later stages, with
investments in the later years of the first decade of the 2000s ranging from as little as $100,000 early on to as much as $15
million in late-stage investment.

Benchmark is interested in investing for the long haul, not 'quick flips,' and looks for entrepreneurs with a similar perspective.
Its investment is geared mainly toward high-tech industries such as the Internet, semiconductors, software, and
telecommunications. The company counts among its investors Bill Gates and the Ford Foundation. The firm manages over $3
billion in committed venture, most of which comes from university endowments, charitable foundations and entrepreneurs. In
2009, Benchmark shared in venture capital investment for one of the top ten venture-backed companies that year, Twitter, Inc.

New Enterprise Associates (NEA) of Baltimore, Maryland, had $8.5 billion under management in 2008 and had funded more
than 500 companies in the information technology (IT) and medical sectors. With initial investments ranging from $200,000 to
$20 million, New Enterprise has been devoted primarily to development-stage companies. Major winners in its portfolio history
include 3Com Corp. and Vertex Pharmaceuticals Inc., highlighting its emphasis on high-tech, communications, and health care.
More than 130 companies from New Enterprise's portfolio have gone public since the VC firm's founding in 1978, and the firm
usually backs about 20 to 30 new companies annually. Despite the downturn in its focus sectors, New Enterprise still seeks
and funds startups and has been one of the most active venture capital firms since the technology bust. Now it supports
developing companies in health care and information technology. In 2009, New Enterprise Associates helped fund two of the


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top ten U.S. venture capital investments-backed companies, Clovis Oncology Inc. and Workday, Inc.

Norwest Venture Partners of Palo Alto, California, is an affiliate of Wells Fargo and had invested in more than 350 companies
and managed more than $650 million in the late years of the first decade of the 2000s. The firm's typical investment ranges
from $10 million to $15 million in start-up or expansion-stage business, focusing on semiconductors, software, and
communications.

Menlo Ventures in Menlo Park, California, is one of Silicon Valley's oldest venture capital partnerships with investment in more
than 80 companies and $4 billion under management. Founded in 1976, the firm focuses on technology companies in
software, security, communications, and Internet services. Menlo Ventures generally backs companies with $5 million to $30
million.

Workforce

Professional venture capital fund managers, or general partners, are usually similar to mutual fund managers in that they
assume control over the assets pooled by the investors and allocate them into a venture or into another fund, in most cases
spreading out investments widely. Known as "gatekeepers," they enter into the firm as general partners, as opposed to the
investors' limited partner status, and provide the resources and expertise the limited partners may lack. Venture capital firms
recruit heavily from Wall Street investment banks and research departments. Compared with those positions, venture capital
affords managers a great deal of independence, although the pay is a bit less.

America and the World

China is a prime spot for venture capitalists due to the tax benefits foreign investors receive. However, by October 2008,
industry experts were forecasting a downturn in the industry due to the global economic crisis. Investment during the third
quarter of 2008 was down 12.1 percent from a year earlier, with $492.1 million invested in only 19 deals. This was the first
time in five years the amount of investment decreased. One venture capitalist called the market in China "somewhere between
uncertain and nonexistent" in a October 2008 Reuters article.

In Australia, the government committed $200 million in Australian dollars to venture capital over a five-year period beginning in
2006, expecting a matching amount from the private sector. As an incentive to venture capitalists, those who invest in early-
stage companies will be exempt from income and capital gains tax. Private sector VC firms welcome the assistance from the
government, but are concerned over some of the strings attached to the tax-exempt offer: funds cannot be over $100 million
and can't be invested in any company worth over $50 million; and early-stage investors are required to divest their holdings
once the company's assets reach $250 million.

VC firms in Thailand were optimistic about the future of "factoring services," which allow a company to sell off its accounts
receivable in order to obtain ready cash. Small- and medium-sized businesses especially welcomed this opportunity,
particularly because banks had made loans for small businesses harder to obtain, according to the Bangkok Post. From 2001
to 2004, factoring more than doubled in the small- and medium-sized enterprise market, as it enables a company more
flexibility in managing its short-term working capital, and its potential market is expected to remain hefty in light of the fact that
small businesses account for most of the economic activity in Thailand.

Further Readings


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     l   "Bigger Firms Grab Venture Capital." Orange County Register, 13 March 2006.
     l   CB Insights. "Q1 2010 Sees Venturre Capitalists Invest $5.91B in 731 Companies." CB Insights Newsletter, accessed
         November 2010 at www.cbinsights.com/venture-capital/q1-2010-sees-venture-capitalists-invest
     l   "College Endowments Deserting Venture Capital." Business Week Online, 21 November 2008.
     l   Engleman, Eric. "Kleiner Perkins Starts Social Fund with Amazon, Facebook, Zynga." TechFlash, 21 October 2010.
         Available at www.techflash.com
     l   Firms Closer to a Payoff Get Venture Capital." The Denver Post, 24 January 2006.
     l   "Gloom Envelops Chinese Venture Capital Industry." Beijing: Reuters, 29 October 2008.
     l   Henderson, Tom. "VC Company to Target Minority-Owned Firms." Crain's Detroit Business, 27 March 2006.
     l   "Latham Helps $50.6M Biotech Deal Survive Tough VC Climate." The Recorder, 20 November 2008.
     l   "No Venture-Backed IPOs Issued in the Second Quarter of 2008." Arlington, VA: National Venture Capital Association, 1
         July 2008.
     l   Malone, Michael. "Is Venture Capital in Trouble?" ABCNews.com, 14 November 2008.
     l   "National Money Tree Full Year Q4 2009." PricewaterhouseCoopers National Venture Capital Association Report Data
         from Thomson Financial. Accessed November 2010 at www.slideshare.net/evanwells/national-money-tree-full-year-q4-
         2009
     l   National Venture Capital Association. "Frequently Asked Questions About Venture Capital." 2009 data accessed
         November 2010 at www.ncva.org.
     l   National Venture Capital Association. Chart. "Full Year 2009-Largest U.S. Venture Capital Investments." Business Day,
         22 January 2010. Citing as source PricewaterhouseCoopers National Venture Capital Association Money Tree Report
         data.
     l   Temkin, Sanchia. "Venture Capital Industry Enters New Phase." Business Day, 1 June 2006.
     l   "Thailand: Venture Capital Firms Upbeat Over Factoring Service Business." Thai Press Reports, 10 March 2006.
     l   "Venture-Backed IPO Drought Continues in the Third Quarter of 2008." Arlington, VA: National Venture Capital
         Association, 1 October 2008.
     l   VC Firms Seek Big Bucks; Gear Up to Invest in Tech Startups; Face Crowded Market." Crain's New York Business, 6
         February 2006.
     l   VCs Tune in to Media." Corporate Financing Week, 1 May 2006.
     l   "Venture Capital Firms Wary of Funding Hooks." Australasian Business Intelligence, 15 May 2006.
     l   "Venture Capital Fundraising Activity Slows in the Third Quarter of 2008." Arlington, VA: National Venture Capital
         Association, 13 October 2008.
     l   "Venture Capital Investment Holds in $7 Billion Range in Q3 2008 Despite Turmoil in the Financial Markets." Arlington,
         VA: National Venture Capital Association, 18 October 2008.
     l   "Venture Capital Investors Hopeful Despite Economy." Miami Daily Business Review, 19 November 2008.




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