The Future of Venture Capital
Andrew Zacharakis
The John H. Muller, Jr. Chair of Entrepreneurship The Arthur M. Blank Center for Entrepreneurship Babson College Wellesley, MA USA
Key Influencers
• Worldwide Savings Glut*
– – – –
– – – –
$11 trillion worldwide in 2005 Chinese savings increasing and spreading worldwide Corporations not distributing excess cash Housing bubbles in Spain, US and elsewhere
Larger Funds More Funds Move to International Markets Follower/Herd Mentality
• VC Driving Forces
•Too Much Money; A global savings glut is good for growth -- but risks are mounting. Rich Miller, Jack Ewing, Stanley Reed, Laura Cohn, Frederik Balfour and David Henry. Business Week 3942 (July 11, 2005): p58.
Key Questions
• How is worldwide glut impacting VC today and into the future? • Where is VC money going?
– Geographic – Stage – Industry
• Where should it go? • What pressures are building?
– Too much money chasing too few deals – Valuations heating back up
Venture Capital Across The World
• $41B worldwide in 2005
– $22B in US – $7.5B in Europe – $3.8B in Asia
Source: VentureXpert.
Percent GDP
0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00
Minniti, M., Bygrave, W., & Autio, E. (2006) Global Entrepreneurship Monitor
Classic Venture Capital Investment Percent GDP, 2004
Greece China Japan Italy Austria Germany Switzerland Australia Finland Spain N. Zealand UK Ireland France Canada Singapore Hungary Denmark Netherlands Norway USA Belgium S. Africa Sweden Mean
Classic High-Tech Venture Capital Investment in Europe and U.S. Percent GDP, 2004
0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0
Percent GDP
Germany
Denmark
UK
Belgium
Greece
Finland
Hungary
France
Netherlands
Ireland
Spain
Austria
Norway
Minniti, M., Bygrave, W., & Autio, E. (2006) Global Entrepreneurship Monitor
Switzerland
Sweden
Mean
Italy
USA
Percent GDP
0.00
Greece Italy Spain China Austria Australia Japan Netherlands Germany UK Norway France Finland USA Switzerland Ireland S. Africa Singapore Canada Belgium N. Zealand Denmark Sweden Mean
0.02
0.04
0.06
0.08
0.10
0.12
Minniti, M., Bygrave, W., & Autio, E. (2006) Global Entrepreneurship Monitor
Early-Stage Venture Capital Investment Percent GDP, 2004
Classic Venture Capital Investment per Company 2004
10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
US$(1,000)
Minniti, M., Bygrave, W., & Autio, E. (2006) Global Entrepreneurship Monitor
Japan Greece Finland China Denmark S. Africa Austria N. Canada Germany UK Sweden Singapore Spain Ireland France Hungary Switzerla Australia Belgium Norway Netherlan Italy USA All Europe
A Closer Look at the U.S.
Fundraising is Picking Back Up
Commitments to Venture Capital Funds
$83.2 $80
$60
$57.6 $50.2
Funds Raised ($B)
$40 $26.7 $20 $7.1 $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 $12.7 $17.1 $18.7 $13.1 $13.1 $22.2
Source: Dow Jones: Venture Source.
Although Overhang is Stabilizing
120
Annual Committed Capital ($M)
100 80 60 40 20 0
80 82 84 86 88 90 92 94 96 98 00 20 19 19 19 19 19 19 19 19 19 19 02 20
Year
Reyes, J. (2004) Private Equity Performance 2004: The Coming Shakeout.
Industry Dynamics
1997
No of Firms/Funds Professionals Total Cap Mgt Avg Firm Size Avg Fund Size First time funds Largest Fund 515/885 4,914 $64.6 B $13m/professional $135.3 M $94.0 M 61 $1,158. M
2003
1027/1954 10,833 $251.4 B $23m/professional $245.7 M $103.5 38 $1,100 M
2005
1714/4157 11,138 $406.8B $36m/professional $237M $98M 27 $1,250M
Reyes, J. (2004) Private Equity Performance 2004: The Coming Shakeout.
2005 data from VentureXpert.
Highest Investment Level Since 2001
Deal Flow and Equity into Venture-Backed Companies
$100 6316 $94.7 $75 4590 6,000 5,000 4,000 3,000 2,000 1,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
$50 1912 $25 1315 $6.4 $0 $9.2 2211
$49.5 2547
3268 $36.2 2387 $22.0 2155 2249 2239 $22.1 $19.3 $21.7
$13.1
$17.9
Amount Invested ($B)
Number of Deals
Source: Dow Jones VentureOne/Ernst &Young
Round Allocation Mirrors Mid-’90s Levels
Deal Flow Allocation by Round Class (Annual)
100%
9% 11% 8%
80%
39% 39% 37%
Restart Later Second
20% *54%
60%
33% 20%
40%
First
*35%
20%
*32%
Seed
0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: Dow Jones VentureOne/Ernst &Young
More than ½ of Dollars Go To Later Rounds in ’05
Investment Allocation by Round Class (Annual)
100%
31% 45%
9% 9%
80%
Restart Later
49%
60%
25% 36% 20%
Second First Seed
40%
*43% *42%
20%
*22%
0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: Dow Jones VentureOne/Ernst &Young
More Investors Participating Alone
Number of Investors Per Round
100% 23% 80% 9% 15% 60% 16% 19% 40% 22% 23% 21% 20% 3 Investors 2 Investors 1 Investor 26% 30% 22% 12% 5+ Investors 4 Investors
20%
30%
34%
0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: Dow Jones VentureOne/Ernst &Young
Valuations Continue Upward Trend
Median Premoney Valuation by Year
$25.0 $25 $20.0 $15.5 $12.9 $10.0 $11.1 $9.3 $10.7 $10.0 $16.0 $12.5
$20
$15
$15.2
$10
$5
$0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: Dow Jones: Venture Source.
Later Stage Valuations Skyrocket
Median Premoney Valuations by Round Class (All Industries)
$40.7 $40
$30 $20.3 $11.7 $10 $6.4 $3.2 $0 $2.9 $2.3 $1.6 $13.6 $5.3
$20
4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 Later Stage Second Round First Round Seed Round
Source: Dow Jones: Venture Source.
Thompson Financials’ US Private Equity Performance Index
Investment Horizon through 12/31/05
Fund Type Seed/Early Stage VC Balanced VC Later Stage VC All Venture NASDAQ S&P
1 Yr 8.3 24.3 6.9 15.6 5.2 6.3
3 Yr 11.7 8.6 7.5 14.2 10.1
5 Yr 10 Yr 20 Yr 41.5 18.9 11.3 23.7 7.7 7.3 20.4 14.6 13.5 16.5 12.4 11.0 -3.5 -4.1 -6.8 -2.2 -1.1
3.1 -10.9
Returns By Percentile
Cumulative IRR as of 12/31/2005 Venture Capital Sample size : 1164 Percentile Group 100.00th percentile 90.00th percentile 80.00th percentile 70.00th percentile 60.00th percentile 50.00th percentile Overall 721.04 38.98 19.69 13.43 8.62 4.36 Seed 257.82 25.64 17.08 10.63 8.46 3.94 Early 721.04 51.62 22.59 13.71 7.25 2.58 Balanced 195.22 32.2 19.36 13.49 9.17 5.56 Later 209.16 31.28 18.45 13.39 9.52 5.04
40.00th percentile
30.00th percentile 20.00th percentile 10.00th percentile 0.00th percentile
0.78
-1.81 -7.28 -14.75 -100
1.73
-0.99 -6.51 -9.77 -31.45
-1.4
-6.53 -11.13 -19.37 -47.88
2.56
0 -3.3 -11.23 -35.45
1.49
-0.57 -2.75 -10.05 -100
Source: VentureXpert
IMPLICATIONS
• Capital overhang is working through. • Size of VC firms continues to grow
– $ outpace partners – Later-stage (lower risk?) deals
• Remain focused on high-tech
– Investing larger amounts at later rounds, tech has most potential to achieve returns
• Less co-investing/syndication
– Need to put more money into each deal – Lowers learning and network reach
• Valuations Heat Up
– Hurts returns – Increases risk
A MOVE TO NEW MARKETS
• 50% of US VCs expect to invest globally by 2010
– Following the entrepreneurs (many US trained)
• China and India are hot markets
– 20% of US VCs plan to invest in China – 18% plan to invest in India
• Investing Strategy
– – – – Co-invest with local investors (42%) Strategic alliances with local VC firms (39%) Open new office with local talent (30%) Transfer partners (10%)
VC Outlook 2010: A Brave, Global WorldMark Jensen and Mark Heesen. Venture Capital Journal. Wellesley Hills: Aug 1, 2005. pg. 1
What Does it Mean?
• Search for better deals?
– Breeder for Technology
• Energy • Water
– Developing Economies – Later, larger absorptive capacity deals
• Who fills in that larger, increasing gap?
– Angels, FFFF, Bootstrapping