VC Market Update for Entrepreneurs
December 2, 2008
Copyright 2008 Scale Venture Partners Confidential 1
Agenda
Investment Outlook – Impact of Recession Deployment of Dollars in 2009 – Where & How? Exit Environment Long Term Outlook Scale Venture Partners
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Investment Outlook
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Context for Current Economy
2000: Tech Bubble: Silicon Valley Exported Its Irrational Exuberance to Wall Street
– Near Term Results: NASDAQ Down 80% – Long Term Impact: Less Venture Dollars, Each Company More Cash Efficient
2008: Wall Street Sent Its Credit Squeeze to the World:
– Near Term Results: NASDAQ Down 40% – Spiraling into Global Recession
– Long Term Impact: TBD
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VC Market Environment More Rational Than 2000
2000
2007
$104 BN Raised
264 IPO’s – Most Unprofitable 7903 VC Investments Nasdaq Peak: 5048 Nasdaq PE at Peak 64+ Nasdaq Peak to Trough:
$35 BN Raised 86 IPO’s - Most Profitable 3931 VC Investments Nasdaq Peak: 2859
Nasdaq PE at Peak 22
Nasdaq Peak to Current:
Down 80%
Down 50%
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Economic Contagion More Dangerous Today
2000
2007
S&P Peak to Trough – 50% Worst Sector - Technology No Real Systemic Risk 9/11 External Threat Drove Second Leg Result “Typical” Post War GDP Decline: Sub 2%
S&P to Date Down 42% Worst Sector - Financials Clear Systemic Risk Subprime First Leg
De-leveraging Second Leg
Global Recession Third Leg Range of Outcomes from Tough Recession to GD II 1929-1933 GDP down 30%
A More Rational Venture Environment will Confront a More Virulent Recession
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Risks In Today’s Economy
Venture-backed Company Execution
– Execution, Clinical, Product Risks
Impact of Economy on Revenue Growth
– Hardest on “GDP Dependent” Businesses
Financing Risk
– Much Harder Today to Raise Money
Valuation Risk
– Will the Market Reward Companies with Appropriate Returns?
– Eventually Risk Will Resolve Itself • Strong Fundamentals Get Rewarded • Investors Ultimately Looking for Return
All Risks Except the First are Impacted by the Economy
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Business Exposure to Changes in GDP
Exposed to GDP Changes Exposed: Consumer Products, Brand Advertising, Elective Surgery
Resistant to GDP Changes
Resistant: Open Source, Virtualization, Low Cost Recurring Revenue Models
Immune to GDP Changes
Immune: Cure Cancer , Cost Saving Non-Elective HC Services
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Financing Risk
See Sequoia Slides… http://tinyurl.com/3erkjz Better Since 2000 – Industry Burnt Once…
– Leaner Burn Rate Overall
– Bootstrapped Companies Use Venture to Scale Final Commercial Phase
– “Just-in-time” Expense Build Up For Growth
Pockets of risk
– Reduced Pools of Equity Capital as VC’s Tend Existing Portfolio – Series B Without Traction
– Syndicate Weakness
– Assume Fewer Strategic Investors/Partners – Clean Tech Cap Ex Projects – Limited Debt Sources
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Deployment of Dollars in 2009 Where? How?
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Bulk of Dollars Into Expansion & Later Stage Deals
Investments By Stage – Q3 2008
Total Amount Invested ($B)
$8
$7
$3.0
$6
$2.5
$5
$3.1 $2.4 $2.1
$3.2 $3.2
$2.8 $3.3 $2.8
Last Four Quarters
$2.8 $3.0 $2.3
23% 39%
$3.1 $3.3 $3.0 $2.6 $3.1 $2.4 $3.1 $3.3 $2.6 $2.7
$4
$3
$2
$1.7
$2.3
$2.6 $2.0
38%
$1
$1.2
$0
$1.1
Q4'05
$1.1
Q1'06
$1.2
Q2'06
$1.4
Q3' 06
$1.6
Q4 '06
$1.3
Q1'07
$1.8
Q2'07
$1.5
Q3'07
$1.7
Q1'08
$1.8
Q2'08
$1.7
Q3'08
Q3'05
Q4'07
Seed/Early Stage
Expansion
Later Stage
PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report Based on Data from Thomson Reuters
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…But Early Stage Companies Being Funded
Q3 2005 – Q3 2008
Number of investments by stage
309 278 274 276 258 333 286 307 312 347 329 321 263 236 224 271 314 320 299
334 294
360 241 294 327
339
272
256
271
307
329
375
420 306
357
382
362
378
350
Q3'05
Q4'05
Q1'06
Q2'06
Q3' 06
Q4 '06
Q1'07
Q2'07
Q3'07
Q4'07
Q1'08
Q2'08
Q3'08
Seed/Early Stage
Expansion
Later Stage
PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report Based on Data from Thomson Reuters
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Software, Biotech, Medical Devices Dominate
Investments By Industry – Q3 2008
IT Investments ($M)
$1,343
IT
$2,835.7 Mil
$403
$396
$323
$178
$120 $73
Software
IT Services
Semiconductors
Telecom
Networking & Equipment
Electronics & Instrumentation
Computers & Peripherals
Life Sciences Investments ($M)
$1,350 $896
LS
$2,301.9 Mil
$56 Biotechnology Medical Devices and Equipment Healthcare Services
PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report Based on data from Thomson Financial
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Clean Tech Investment Remains Strong
Q3 2005 – Q3 2008
Internet-Specific Investments ($M)
$1,644 $1,002 $998 $1,256 $1,182 $1,088 $1,226 $1,061 $1,401 $1,352 $1,057
300 250 200 150 100 50 0
$763
$836
Q3'05
Q4'05
Q1'06
Q2 '06
Q3 '06
Q4 '06
Q1'07
Q2'07
Q3'07
Q4'07
Q1'08
Q2'08
Q3'08
$ Invested
Clean Tech Investments ($M)
# of deals
70 60 50 40 30 20 10 0
$1,172 $1,036 $886 $708 $508 $289 $112 $123 $377 $245 $470 $578 $887
Q3'05
Q4'05
Q1'06
Q2 '06
Q3 '06
Q4 '06
Q1'07
Q2'07
Q3'07
Q4'07
Q1'08
Q2'08
Q3'08
$ Invested
# of deals
PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report Based on Data from Thomson Reuters
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Less Investment – Better Risk/Reward Balance
VC’s Will Have Less Money to Spend
– More Allocated to Reserves
Stage? Sectors? It Will Go into Risk Reduced Deals
– Lower Exposure to GDP
– Lower Burn Rate
Valuations - Who is Right?
– Public Values Adjust Quickly – Over React? – Private Values Lag – Under React? – Prices Still Appear High Today, Particularly with Little 2009 Visibility
Returns
– Public Markets Have Ceded 2 Years of the Growth Cycle Back to Venture Investors – Winnowing out Occurs in Private vs. Public Markets
– Result is Few, Bigger IPO’s with Better Metrics and Fewer Competitors
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Exit Environment
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Venture Exit Counts - IPOs and M&A by Year
700 600
Number of Issues
500 400 300 200 100 0
91 92 M&A 17 76 IPO
M&A IPO
93 94 95
96 97 98
'08 99 '00 '01 '02 '03 '04 '05 '06 '07 9 mo
74 100 98 118 172 221 248 327 388 341 299 351 371 387 361 220 22 29 93 57 57 86 6
156 181 220 166 202 270 136 77 260 264 41
Year
Source: Thomson Reuters & NVCA
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IPO Exit Environment – Market Feedback
86 IPO’s in 2007 – High Water Mark until 2010
– But 2010 is Expected to be Stronger than 2007
To Resume, Will Need:
– Multiples to Expand – Volatility to Decrease – Earnings Visibility to Increase – 1- 3 Quarters of Cash Flow Positive Operations
M&A
– Will Face Pressure – Accretive Transactions Still Getting Done
Banker Quotes:
– “Harsh Winter Is Good As Leaves More Room for Winners to Survive”
– “Fortunes Will Be Made in Next 12 Months…by Buying Not Selling”
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Long Term Outlook
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Venture Backed Companies Lead the Economy
Tech & Healthcare Companies
Amgen
Apple
Boston Scientific Cisco Genentech
Tech Sector is 18% of S&P Healthcare is 14.3% of S&P Venture Backed Companies Represent 18% of US GDP Job Growth 2-1/2x the Market
Genzyme
Google Intel Microsoft Oracle
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What Does History Tell Us?
IBM During Great Depression
70 60 50 40 30 20 10 0 350 300 250 200 150 G DP ($B) 100 50 0
I BM Annual R ev enue ($M)
Mid 1980’s and Late 1990’s Tech Bubbles
– When Venture Fundraising Declines, Returns Increase – True in Mid 1980’s & History Repeated Itself in the Mid 1990’s – Best Companies Were Built During Troughs: Microsoft, Cisco, Google
Today
– Venture Funding on Secular Decline – If History Repeats Itself, Good Time to Invest
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Venture Capital Summary
Venture Is Not Dead Innovation Expected to Lead US Economy Out of Recession
However…Venture Is Not Immune to Current Economy
Therefore…It Will Require More Time & Money Per Company to Exit
– Higher Failure Rates – Winners Will Do Better - Healthier Companies with Fewer Competitors
– Fund Returns May Be at Strong Multiple
Venture Contraction Will Continue…& Leave Survivors Healthier
– Short Term Dislocation – Continuous Since 2000 – Benefit to Industry Overall
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A Letter to Venture-Backed CEOs
“don't forget that surviving is not winning, and winning requires more than cutting.”
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Scale Venture Partners
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About Scale Venture Partners
Formed in 2000 Invest in Technology & Healthcare
Invest Throughout U.S. – 50% ex-Silicon Valley
Since Fund Formed:
– 33 M&A Exits – 11 IPO’s – 4 Exits in 2008
Proactive, Theme-based Investment Strategy
Partners Have Worked Together > 10 Years – Significant Operating Experience in Investment Sectors www.scalevp.com
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Investing in the Middle of the Risk-Reward Continuum
We Invest Early in a Company’s Evolution but After experimentation Is Over … The Benefits:
Reduced Risk Faster Time to Exit Significant Ownership Ability to Add Value
Early
ScaleVP
Late
Higher Risk / Higher Return
Lower Risk / Lower Return
ScaleVP:
Proprietary Deal Sourcing Over 40% of Deals Series A 17% Average Ownership 1st/2nd Largest Investor
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Copyright 2008 of 9/30/08 Financial Data as Scale Venture Partners
Consistent Track Record of Quality Exits Has Built Reputation and Network
Over $8.6B in Value Created in 33 Exits in 8 Years (11 IPOs)
2000
Financial 2008 Scale Venture Copyright Data as of 9/30/08 Partners
2002
Financial Data as of 9/30/08 pro forma
2004
2006
2008
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ScaleVP Among Top Venture Firms for Exits
All Deals Post-Bubble 2003-2007
Value Created ($Ms) $185,067 $184,597 $12,424 $11,547 $10,210 $8,853 $7,776 $7,212 $6,512 $6,278 $4,003 $3,893 $3,785 Value Created ($Ms) $3,770 $3,751 $3,734
Rank
1 2 3 4 5 6 7 8 9 10 11 12 13
Firm
KPCB Sequoia Capital TA Accel Battery Ventures NEA Madison Dearborn Benchmark Warburg Domain Venrock Menlo Ventures JP Morgan
# of Deals >$200M 9 12 6 12 9 16 3 12 6 16 9 8 5
Rank
14 15 16
Firm
DFJ Foundation Apax
# of Deals >$200M 3 6 6
17
18 19 20 21 22 23 24 25
Greylock
ScaleVP Charles River Versant Vertical Group TCV Globespan Sprout August Capital
7
8 6 10 1 8 4 6 4
$3,670
$3,626 $3,567 $3,565 $3,562 $3,534 $3,533 $3,484 $3,479
Source: Venture Source for US Venture Capital Exits 2003 to 2007. Includes all exits > $200M at time of IPO or M&A. Credit given to board member investors only. Ranked by most recent market capitalization on 5/21/2008.
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Scale Venture Partners
Contact:
Scale Venture Partners 950 Tower Lane, Suite 700 Foster City, CA 94404 phone: (650) 378-6000 fax: (650) 378-6040
Email:
Businessplan@scalevp.com
Web:
www.scalevp.com
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