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Early Stage Capital Markets Presentation v.posting.ppt
 

Early Stage Capital Markets Presentation v.posting.ppt

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  • The Venture Economics Post-Venture Capital Index (PVCI) reflects the market volatility that has been ongoing for the past two years. The PVCI is a market cap weighted index of the performance of stock of all venture-backed companies taken public over the last 10 years. The poor performance of the PVCI can be attributed to the downturn of Internet stock performance and the almost record breaking number of young, private companies hitting the public realm in 1999 and early 2000.
  • 1) 35% of Internet IPOs traded above their first day closing price; 65% traded below their first day close 2) Only 88 of the 98 Internet-related IPOs this year are above their offering prices (the Standard) 3) Source details: includes all Internet IPOs since Netscape in 8/95 except for AOL, CMGi, Intuit, PSINet and RSA Security.
  • 1) 35% of Internet IPOs traded above their first day closing price; 65% traded below their first day close 2) Only 88 of the 98 Internet-related IPOs this year are above their offering prices (the Standard) 3) Source details: includes all Internet IPOs since Netscape in 8/95 except for AOL, CMGi, Intuit, PSINet and RSA Security.
  • Gross margins have remained flat while revenues have grown and expenses have been cut – Marketing, technology and content.
  • LTM Asset Turnover: Multiple indicating how well a company is using its current assets to generate sales. FORMULA : Revenue / Average Current Assets From June 1, 1998 to end of Dec. 1999 AMZN share price increased 1,429% (in the same period the S&P rose 30%). Barnes & Noble and Borders plummeted by over 50%. AMZN captured 7% of the US book market in 2000. However Barnes and Borders continued to expand market share - they own over 35% of the market up from 28% in 1996. AMZN lost market share in 2001 while Barnes and Borders remained flat.
  • LTM Asset Turnover: Multiple indicating how well a company is using its current assets to generate sales. FORMULA : Revenue / Average Current Assets From June 1, 1998 to end of Dec. 1999 AMZN share price increased 1,429% (in the same period the S&P rose 30%). Barnes & Noble and Borders plummeted by over 50%. AMZN captured 7% of the US book market in 2000. However Barnes and Borders continued to expand market share - they own over 35% of the market up from 28% in 1996. AMZN lost market share in 2001 while Barnes and Borders remained flat.

Early Stage Capital Markets Presentation v.posting.ppt Early Stage Capital Markets Presentation v.posting.ppt Presentation Transcript

  • Wisdom from the Wizard of Omaha
    • “ Nothing sedates rationality like large doses of effortless money.”
          • Warren Buffet Berkshire-Hathaway Annual Report for 2000
          • (Net profits rose 113%; earning/share rose 2X)
    • “ Despite three years of falling prices, which have significantly improved the attractiveness of common stocks, we still find very few that even mildly interest us. That dismal fact is testimony to the insanity of valuations reached during The Great Bubble. Unfortunately, the hangover may prove to be proportional to the binge.”
    • Warren Buffet March 2003
  • The New Economy View up to March 2000
    • The Internet changes everything
    • The economic model of every business will be transformed
    • Move first, be the Biggest, Fastest
    • Spend and spend; Equity is currency
    • Emphasize marketing hype over real execution
    • Lay-off the risk onto the Public Market
  • US Venture Capital Investments 1995 - 2000 1,174 deals 1,676 deals 1,840 deals 2,046 deals 3,317 deals 4,107 deals Source: PriceWaterhouseCoopers (PWC) MoneyTree Survey in partnership with VentureOne, 2000
  • Mid-1990sVenture Capital Returns, Select Funds
    • Examples of Funds over 3 years old
    • Fund Name Inception IRR
    • Summit III 1991 64%
    • Kleiner Perkins VI 1992 39%
    • Mayfield VII 1992 25%
    • Sequoia VI 1992 110%
    • Accel IV 1993 79%
    • Battery Ventures 1994 23%
    • Summit IV 1995 101%
    • Kleiner Perkins VIII 1996 287%
    • Matrix Partners V 1997 516%
  • Mega VC Funds Source: VentureOne, WSJ, 10/8/00
  • Venture Capital Investments in the Internet - 5 yr review Source: PWC MoneyTree Survey Report, 2000
  • VC Investments by Stage of Development Percentage of Total Deals 1995 – 1999 Misha Petkevich: Source: PWC MoneyTree Survey and VentureOne, 2000
  • From Capital Market Bubble to Tech Bubble
    • Tech spending grew by 2x the ’90-’96 rate from ’97-’00; bandwidth by 130% year on year from ’98-’00
    • Unprecedented venture and borrowing activity (next slide) = huge jump in tech spending, esp. comm infrastructure; amplified competitively as older firms responded
    • Tech vendors exacerbated by vendor financing and investment in start-ups
      • Impacts on company financials for quarterly reporting
      • Compensation impacts
    • Self-reinforcing, but ultimately unsustainable tech-capital market cycle
  • Size of Telecom Fiasco
    • From 1996-2001, Telecom, a $300 Billion industry:
      • Borrowed $1.5 Trillion in bank/non-bank lending
      • Issued $630 Billion in Corporate Bonds
    • Creative Accounting exacerbated impacts
      • Use of bandwidth swapping to generate phantom revenue
      • Sales inflation, fraud
    $$--Billions Source: Thomson Financial; WSJ
    • The bursting of the equity market bubble changes everything
    • Maybe the New Economy isn’t so New
      • Amazon and B2C E-tailing – What assumptions were wrong?
      • B2B – What assumptions were wrong?
    • Financial Markets: PROFITS and CASH FLOW, not Marketing hype
    • Venture Fund Practice: Conserve Capital
      • Kill/Dispose of clear losers in existing portfolios
      • Reinvest to support rest of portfolio
    • Pray for recovery
    The New New Economy View
  • US Venture Capital Investments 1995 - 2002 1,840 deals Source: PriceWaterhouseCoopers (PWC) MoneyTree Survey in partnership with VentureOne, 2002
  • US Venture Capital Investments 1995 – 2002, by Quarter Source: PriceWaterhouseCoopers (PWC) MoneyTree Survey in partnership with VentureOne, 2003
  • US Venture Capital Investments by Stage of Development 1997-2003 % of total deals
  • Shifts in VC Industry Sector Focus
    • Shift to “safer” investments
    • Shift out of tech to bio
    • Shift to enterprise value creation from infrastructure (x-wireless)
                                                                                                                         
  • Venture-Backed IPO and M&A activity by quarter Source: Venture Economics and the National Venture Capital Association
  • Exit Strategies for Venture-backed Companies M&A IPO Source: Securities Data Corporation
  • Global M&A Activity (2000-2002)
    • Global M&A Activity has cratered
    • 1997-2000, headcount grew by 40% and remuneration by 88%
    • 2001, revenues fell 13%, employment 8%
    • Retrenchment is continuing – estimated 30K-50K investment banking jobs eliminated
    Unit = $$ Billions Source: Wall Street Journal and P&P estimates
  • Venture Economics Post-Venture Capital Index (PVCI) Annualized Returns Source: Thomson Financial & National Venture Capital Association. As of 2/28/03
  • Net Returns of Venture Capital Funds
    • A mature asset class?
    • $60-70 billion in un-invested, committed capital
    • Limited partners are seeking return of un-invested capital
    • More asset write-downs to come
    • $4-5 billion in secondary market sales estimated for 2002
    Source: Thomson Financial/Venture Economics & National Venture Capital Association
  • Recent-vintage Venture Fund Returns
    • Examples of Funds less than 3 years old
    • Fund Name Inception IRR
    • Menlo Ventures VIII 1999 - 34%
    • Softbank V 1999 - 30%
    • Oak IX 1999 - 34%
    • Worldview Tech. III 1999 - 50%
    • Sequoia IX 1999 - 4%
    • Battery Ventures VI 2000 - 34%
    • Kleiner Perkins XA 2000 - 15%
    • Accel VIII 2000 - 22%
    • Matrix Partners VII 2001 - 39%
  • Mega Fund Cuts
  • Fallout on Wall Street
    • Lots and lots of suits by investors, states and SEC
    • Basic conflict of interest between banking and equity research/brokerage functions
    • Analysts recommended ‘buys’ to clients while their firms sold sold sold
    • Other issues:
      • IPO allocations in return for trading commissions
    Buy Recommendations as a % of all recommendations Sell Recommendations as a % of all recommendations
  • Top 20 Countries by Investment (2000) Source: PWC Global Private Equity Report by US $ Billion
  • Top 20 Countries based on Investment Growth (1995-2000) Source: PWC Global Private Equity Report Over 5 years, by percentage
  • Asia Private Equity Bubble Tracks US with Lag 10,455 2002
  • Asia Venture Bubble Subsides 2002 2,990
  • Locational Composition of Asian Private Equity Investment, 2001
  • Asian Private Equity: Composition by Investment Stage, 2002 Source: AVCJ
  • Asian Private Equity: Industry Composition, 2002 Source: AVCJ
  • New York Venture Capital
    • Prior to 1950s – Individuals in the finance sector
    • 1946 – Family funds begin operations
    • Early 1960s – Formal VC funds emerge
    • 1969 – Citicorp Venture Capital and its progeny
    • 1980s – Later stage investment for other regions
    • 1980s – Buyouts, refinancings, bridge financings
    • Mid 1990s – Silicon Alley
    Source: Prof. Martin Kenney, Work in Progress, 2000
  • San Francisco Bay Area Venture Capital
    • 1958 SBIC Act prompts them to incorporate to leverage Federal funds
    • 1960s – Limited partnership form mergers to gather larger amounts of capital.
    • 1970s – Larger deals still dependent on East Coast for funds
    • 1970s – Technology industry veterans join the VC industry
    • 1980s – SV begins to achieve financial independence due to pension fund monies
    • 1980s – Deal making accelerates and all prominent VCs must have office in Silicon Valley
      • East Coast VCs establish branch offices
      • San Francisco-based VCs move to Menlo Park
    Source: Prof. Martin Kenney, Work in Progress, 2000
  • Amazon’s Improving Margins Sources: Company 10Q filings
  • Amazon: Pro Forma earnings vs. GAAP Losses Sources: Public filings
    • Amazon’s “pro forma operating profitability” number is computed by ignoring lots of expenses
    • Profit numbers exclude stock-based compensation, restructuring expenses, and investment losses
    • Staggering $2.2 Billion in Debt
    • Today, shares are down over 70% from the peak
  • Has Amazon Turned the Corner? (Q/Q growth and Inventory Turns) Source: Company Reports
  • Has Amazon Turned the Corner? (Sales Efficiency of Capital Spending) Source: Company Reports