Venture Capital Today


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Venture Capital Today

  1. 1. Venture Capital Today Robert W. Conn Managing Director Enterprise Partner Venture Capital La Jolla, CA March 13, 2006 Seminar Talk for the Department of Computer Science and Engineering, University of California, San Diego (UCSD)
  2. 2. About Enterprise Partners VC <ul><li>Enterprise Partners was founded in 1985 and is the largest venture capital firm headquartered in Southern California with over $1.1 billion in capital under management. The firm focuses on seed, early stage and promising later stage companies developing technologies and market solutions in both IT and the life sciences. The firm is currently investing its sixth fund whose size is $353M. </li></ul><ul><li>Our partners are entrepreneurs themselves, having formed, run and sold multiple companies across a spectrum of industries. Along with a professional staff bringing financial, legal, product development, marketing and operations support to the firm, the partners at Enterprise draw on their experience and partner with our portfolio companies to achieve success. </li></ul>
  3. 3. The Purpose of Venture Capital <ul><li>To Provide High-Risk Capital to Enable Innovations and Inventions, Often from Universities and Research Institutes, to Move from Concept to Commerce </li></ul><ul><li>To Help Create Large Economic Value for Founders, Management, Employees and Investors </li></ul><ul><li>To Build New Companies, Create Jobs, and Help Ensure Economic Growth and Long Term Economic Prosperity </li></ul>
  4. 4. The U.S. Venture Capital System Has Been and Is an “Unfair U.S. Advantage” – How did that Happen? <ul><li>The Enabling Event : The1979 Dept. of Labor Clarification of the “Prudent Man” Rule Catalyzed Modern Venture Capital. </li></ul><ul><ul><li>The Ruling meant the Labor Department would not view the allocation of a small portion of Managed Pension Funds in higher risk “Venture Capital” as “Imprudent” – even if a number of firms in a VC fund failed. </li></ul></ul><ul><ul><li>The Ruling Enabled “Risk Capital” as an Asset Class – It Opened the Door to Pension Funds, University Endowments, and others for VC Firms - and Led to the Modern Venture Capital Asset Class </li></ul></ul><ul><li>Two Other Key Milestone Events : </li></ul><ul><ul><li>The Steiger Amendment in 1978 - which Reduced the Capital Gains Tax from 49% to 25%. This provided a strong financial incentive for Individuals to Start Companies </li></ul></ul><ul><ul><li>The Bayh-Dole Act of 1980 - which granted Sole ownership of discoveries made under Federal Government financial support (e.g., Grant for Research at Universities) to the Universities, Non-Profits and Small Businesses where they were made. </li></ul></ul><ul><ul><ul><li>The Act permitted exclusive licensing by a university to enable the development and transfer of an invention to the marketplace for the public good </li></ul></ul></ul><ul><ul><ul><li>The Act Provided a Strong incentive for universities to form research collaborations with industry </li></ul></ul></ul><ul><ul><ul><li>It was understood that this would be a stimulant for the U.S. economy. </li></ul></ul></ul>
  5. 5. Venture Capital Has Been a Key “Fuel” for the U.S. Economic Engine, Enabling the Translation of Discovery and Innovation into Products and Services, Jobs, and Successful New Businesses. <ul><li>In 1979, there were 25 VC firms that raised about $500M for venture capital investment. In 2005, there were about 125 VC firms that raised and invested about $20B. </li></ul><ul><li>Venture-Backed Companies are a Major Economic Stimulant and Contribute Importantly to U.S. Economic Competitiveness </li></ul>
  6. 6. Venture Capital Backed Companies Do Make a Real Difference in U.S. Jobs and Economic Vitality and Leadership The Top Dozen High-Tech Companies by Market Value (Dec. 2005)
  7. 7. Metrics in Addition to Market Cap of the Economic Impact Of Venture-Backed Companies <ul><li>Jobs : 18% of Workers in the U.S. are at Companies that were Original Financed by Venture Capital </li></ul><ul><li>Payroll : 24% of Payroll in the U.S. is From Companies that were Originally Financed by Venture Capital </li></ul><ul><li>Implication – The Economic Impact of VC-Backed Companies is Large, and the Jobs Pay Well </li></ul>
  8. 8. Venture Capital Today – Recovered from the Bubble Years and Raising and Investing $20 Billion Per Year Source: Ernst & Young / Dow Jones VentureOne
  9. 9. - Venture Capital Today is Still Adventurous - U.S. Seed/First Round Investment over the Past 10 Years Source: Ernst & Young / Dow Jones VentureOne
  10. 10. Median Deal Size is About $7 Million Across All Rounds of Investments ($ Millions) $10 Source: Ernst & Young / Dow Jones VentureOne
  11. 11. Southern California Is a Vibrant Place for Venture Deals As Shown By 2005 Venture Capital Financings $2.1 Billion Invested – 10% of U.S. Total 204 Deals Software 15% <ul><ul><ul><ul><ul><li>Cons/Bus </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Services 7% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Biopharmaceuticals </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>23% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Health </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Services </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>4% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Retailers </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>1% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Semis 15% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Comm 11% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Info Services </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>3% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Med Devices 13% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Electronics 2% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Other 2% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Cons/Bus </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Products 1% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Med IS 2% </li></ul></ul></ul></ul></ul>Software 25% <ul><ul><ul><ul><ul><li>Cons/Bus </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Services 8% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Biopharmaceuticals </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>16% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Health </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Services </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>3% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Retail 2% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Semis 11% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Comm 8% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Info Services </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>4% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Med Devices 12% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Electronics 3% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Other 4% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Cons/Bus </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Products 1% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Med IS 2% </li></ul></ul></ul></ul></ul>Energy 1% Energy 1% Source: Ernst & Young / Dow Jones VentureOne
  12. 12. San Diego Also Has a Vibrant Local Venture Capital Infrastructure <ul><li>San Diego is Fifth in the U.S. in Terms of Deals and The Dollar Value of Venture Financings, and 2 nd in California after Silicon Valley. </li></ul><ul><li>San Diego VC Financings Are About $1 Billion Per Year </li></ul><ul><li>San Diego has More Than 20 Venture Capital Firms Headquartered in the Region and Many Major Service Providers - </li></ul><ul><li>San Diego’s Three Largest Venture Capital Firms Are: </li></ul><ul><li>-Enterprise Partners Venture Capital – Founded in 1985. Capital Under Management: $1.1 Billion </li></ul><ul><li>-Forward Ventures – Founded in 1993. </li></ul><ul><li>Capital Under Management: $460 Million </li></ul><ul><li>-Mission Ventures – Founded in 1997. </li></ul><ul><li>Funds Under Management: $460 Million </li></ul>
  13. 13. San Diego Venture Financings in 2005 By Dollars Invested, 60% of Deals were Life Sciences and 40% IT – The Ratio is 50-50 When Measured By Number of Deals Done $898 Million Invested 85 Deals <ul><ul><ul><ul><ul><li>Biopharmaceuticals </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>51% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Other 3% </li></ul></ul></ul></ul></ul>Software 16% <ul><ul><ul><ul><ul><li>Cons/Bus </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Services </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>4% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Semis 13% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Comm 2% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Med Devices 7% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Med IS 2% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Healthcare </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Services2% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Biopharmaceuticals </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>35% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Other 5% </li></ul></ul></ul></ul></ul>Software 26% <ul><ul><ul><ul><ul><li>Cons/Bus </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Services 7% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Semis 10% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Comm 2% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Med Devices 11% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Med IS 2% </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Healthcare </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Services2% </li></ul></ul></ul></ul></ul>Source: Ernst & Young / Dow Jones VentureOne
  14. 14. <ul><li>Trends in the Information Technology (IT) Market and Some Observations for Startup Companies and Venture Capital </li></ul><ul><li>IT includes Essentially all High Tech that’s not Bio-based – Media, Networking, Communications, Software, Consumer Electronics, Telecom Semiconductors, Computing </li></ul>
  15. 15. We’ve Entered the Era of the Digital Consumer
  16. 16. Venture Capital Today and IT Startups <ul><ul><li>There’s Always a New Wave Coming - The IT Trail - - </li></ul></ul><ul><ul><ul><li>From the Mainframe of the ’60’s to the Minis of the ’70’s to PCs in the ’80’s, and the Internet and Wireless/Mobility in the ’90’s, there continues to be an On-Going Revolution in the Markets and Products </li></ul></ul></ul><ul><ul><li>Globalization and the Rise of the Innovation Culture around the World is an Opportunity, Not a Threat </li></ul></ul><ul><ul><li>“ Moore’s Law”, and All it Enables for Semiconductor Performance, Continues – with Great Impact on Computing, Communications, Networking and Storage </li></ul></ul><ul><ul><li>Can we Build Major Value from Startup to Finish in a Capital Efficient Way? That today probably means less than $30M invested prior to Exit. Globalization has helped here. </li></ul></ul>
  17. 17. The Key Points for Startup Companies and Entrepreneurs <ul><li>Address a Major Need – In Most Areas, the Needs and Pain-Points are Known. So </li></ul><ul><ul><li>Provide a Distinctive and Protectable Solution </li></ul></ul><ul><ul><li>Address a Major Market – Large Markets Enable Large Exits! </li></ul></ul><ul><ul><li>Identify the Customers and Insure the Solution is a “Must Have”, as Opposed to “Nice to Have”. </li></ul></ul><ul><ul><li>Understand the Competitive Landscape – Incumbents, Other Startups </li></ul></ul><ul><ul><li>Build a Strong Team and Execution Plan , taking account of Capabilities and Markets Globally </li></ul></ul><ul><ul><li>Have Strong, Early Financial Support - to Execute on the Product Development and Go-to-Market Plan </li></ul></ul>Venture Capital Firms Will Do Their Diligence to Confirm the Value Proposition, and Work with Entrepreneurs and Their Companies In Building a Strong Team and Execution Plan
  18. 18. Summary: Venture Capital Today is Alive and Well <ul><li>California Remains the Country’s Center of Gravity for Venture Capital and Start-Up Companies </li></ul><ul><li>Southern California and San Diego are Vibrant Regions for Start Up Companies and Talent in Both IT and Biotech/Life Sciences </li></ul><ul><li>An Academic with an Entrepreneurial Bent Can Create a Company and Be Successful – There are Many Examples </li></ul><ul><li>To Provide A Sense of Markets and Companies That We at Enterprise Partners Have Found To Have Compelling Stories, the Next Slide Lists Recent EPVC Investments Over the Past 12 Months, and the Following Slide is a List of My Investments Since Joining Enterprise Partners in July of 2002. </li></ul>
  19. 19. Recent Enterprise Partners Investments <ul><li>3Leaf Networks - 3Leaf Networks is developing the infrastructure for virtual servers in the enterprise data center. Santa Clara, CA Partner: Bob Conn </li></ul><ul><li>Anaborex - Anaborex is an early stage biotechnology company developing drugs for the treatment of the wasting syndrome many cancer patients experience towards the late stages of their disease. San Diego, CA Partner: Drew Senyei </li></ul><ul><li>Celladon - Celladon is an exciting new biotechnology company focused on developing treatments for cardiovascular diseases. Celladon’s drug products have shown beneficial results in preclinical studies in reversing the morbidity and mortality of Congenital Heart Failure. San Diego, CA Partner: Drew Senyei </li></ul><ul><li>DeviceScape Software - DeviceScape provides a software platform that enables the development of a broad range of wireless devices that connect easily, coordinate seamlessly and can be managed. Brisbane, CA Partner: Bill Stensrud </li></ul><ul><li>Expresso Fitness - Expresso Fitness provides networked and interactive software and cardio equipment for the multi-billion dollar fitness industry. Sunnyvale, CA Partner: Bill Stensrud </li></ul><ul><li>Identrust - Identrust™ is a global identity solutions provider that is bank-built and government regulated. San Francisco, CA Partner: Carl Eibl </li></ul><ul><li>Muze - Muze is the leading source of entertainment product information for music, books, films, and games. Muze content provides customers with detailed information about entertainment products. New York, NY Partner: Bill Stensrud </li></ul><ul><li>Tarari - Tarari designs and produces content processors that accelerate and offload compute-intensive, complex algorithm used in XML/web services, network security and digital media environments. San Diego, CA Partner: Bob Conn </li></ul><ul><li> - vMix is a free, global, video sharing online community for personal video sharing and brings together three communities: creators, viewers and advertisers in a marketplace of content. San Diego, CA Partner: Carl Eibl </li></ul><ul><li>WideRay Corp - WideRay enables the deployment of &quot;proximity services&quot;, targeted, on-demand, on-location delivery of content, transactions, software, and services directly to end-user mobile devices. San Francisco, CA Partner: Bill Stensrud </li></ul>
  20. 20. Investments Led By Bob Conn Since Joining EPVC in July of 2002 <ul><li>Pathscale, Inc . – Jan. 2003. Pathscale provides chip and software solutions to Accelerate Commodity-Based Cluster Computing. Acquired by Qlogic in Feb. 2006 </li></ul><ul><li>TwinStar Systems, Inc . – Dec. 2003. Metrology system for advanced semiconductor whole-wafer and in-line inspection. Shutdown in June, 2004. </li></ul><ul><li>NEXX Systems Inc . – April, 2004 – NEXX develops and sells Back-End Equipment to Firms Packaging and Assembling Semiconductor Chips and Displays. Revenues of $20M in 2005 and Growing. </li></ul><ul><li>Pivotal Systems Inc . – April, 2004. Pivotal develops in-situ, closed-loop control solutions for etch and deposition semiconductor processes equipment. Exceeded $1M in Revenue in 2005 and growing. </li></ul><ul><li>NetSift (from UCSD – final EP Investment led by another EP partner) – June, 2004. NetSift develops deep packet network processing technology for security. Acquired by Cisco in June, 2005. </li></ul><ul><li>Nuelight Inc. – October, 2004. Nuelight develops analog and mixed signal chip solutions for OLED Displays used in Handsets, Monitors and HDTV. </li></ul><ul><li>3Leaf Networks - April, 2005. 3Leaf is developing the infrastructure required to support both the scale-up and scale-out of Commodity Virtual Servers for major compute-intensive industry needs . </li></ul><ul><li>Quorum Systems – Joined Board Nov. 2005. Quorum is a fabless semiconductor company that develops highly integrated, multi-mode radio frequency (RF) transceivers in a single-chip CMOS solution for cell phones and converged handsets (GSM or CDMA plus Wi-Fi and Bluetooth). </li></ul><ul><li>Ascendent Systems – Joined Board Nov. 2005. Ascendent makes software to connect cell phones to a corporate PBX, enabling office-phone functions to be extended to Mobile Users with one phone number. Acquired by RIM, March, 2006 </li></ul><ul><li>Tarari, Inc . – January, 2006. Tarari develops and delivers software-enabled ASIC and board-level solutions for advanced content inspection and acceleration applications that improves network and application performance. Exceeded $3M in Revenue in 2005 and growing. </li></ul><ul><li>------------ </li></ul><ul><li>Two Seed Investments – Scoperta - Oct. 2005 (from UCSD) (Materials for consumer and industrial products) –and Novowave – Dec. 2005 (Digital Home Networking for Consumer Products.) </li></ul>