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ScaleVP Marketview Dec2008

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A detailed market view for entrepreneurs managing venture-backed businesses during the downturn; includes a pragmatic view of fundraising for unfunded and venture-backed startups alike.

A detailed market view for entrepreneurs managing venture-backed businesses during the downturn; includes a pragmatic view of fundraising for unfunded and venture-backed startups alike.

Published in: Business, Economy & Finance

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  • Transcript

    • 1. VC Market Update for Entrepreneurs December 2, 2008
    • 2. Agenda
      • Investment Outlook – Impact of Recession
      • Deployment of Dollars in 2009 – Where & How?
      • Exit Environment
      • Long Term Outlook
      • Scale Venture Partners
    • 3. Investment Outlook
    • 4. 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
    • 5. VC Market Environment More Rational Than 2000 2000
      • $104 BN Raised
      • 264 IPO’s – Most Unprofitable
      • 7903 VC Investments
      • Nasdaq Peak: 5048
      • Nasdaq PE at Peak 64+
      • Nasdaq Peak to Trough:
        • Down 80%
      2007
      • $35 BN Raised
      • 86 IPO’s - Most Profitable
      • 3931 VC Investments
      • Nasdaq Peak: 2859
      • Nasdaq PE at Peak 22
      • Nasdaq Peak to Current:
        • Down 50%
    • 6. Economic Contagion More Dangerous Today A More Rational Venture Environment will Confront a More Virulent Recession 2000
      • 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%
      2007
      • 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%
    • 7. 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
    • 8. Business Exposure to Changes in GDP Resistant: Open Source, Virtualization, Low Cost Recurring Revenue Models Immune: Cure Cancer , Cost Saving Non-Elective HC Services Exposed: Consumer Products, Brand Advertising, Elective Surgery
    • 9. 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
    • 10. Deployment of Dollars in 2009 Where? How?
    • 11. Bulk of Dollars Into Expansion & Later Stage Deals Investments By Stage – Q3 2008 Last Four Quarters Total Amount Invested ($B) PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report Based on Data from Thomson Reuters
    • 12. … But Early Stage Companies Being Funded Q3 2005 – Q3 2008 PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report Based on Data from Thomson Reuters Number of investments by stage
    • 13. $2,835.7 Mil $2,301.9 Mil IT Investments ($M) Life Sciences Investments ($M) Software, Biotech, Medical Devices Dominate Investments By Industry – Q3 2008 PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report Based on data from Thomson Financial
    • 14. Clean Tech Investment Remains Strong Q3 2005 – Q3 2008 PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report Based on Data from Thomson Reuters Clean Tech Investments ($M) Internet-Specific Investments ($M)
    • 15. 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
    • 16. Exit Environment
    • 17. Venture Exit Counts - IPOs and M&A by Year Source: Thomson Reuters & NVCA
    • 18. 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”
    • 19. Long Term Outlook
    • 20. Venture Backed Companies Lead the Economy
      • Tech & Healthcare Companies
      • Amgen
      • Apple
      • Boston Scientific
      • Cisco
      • Genentech
      • Genzyme
      • Google
      • Intel
      • Microsoft
      • Oracle
      • 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
    • 21. What Does History Tell Us?
      • IBM During Great Depression
      • 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
    • 22. 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
    • 23. “ don't forget that surviving is not winning , and winning requires more than cutting.” A Letter to Venture-Backed CEOs
    • 24. Scale Venture Partners
    • 25. 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
    • 26. Investing in the Middle of the Risk-Reward Continuum
      • Reduced Risk
      • Faster Time to Exit
      • Significant Ownership
      • Ability to Add Value
      Early Higher Risk / Higher Return Late Lower Risk / Lower Return ScaleVP Financial Data as of 9/30/08 We Invest Early in a Company’s Evolution but After experimentation Is Over … The Benefits:
      • Proprietary Deal Sourcing
      • Over 40% of Deals Series A
      • 17% Average Ownership
      • 1 st /2 nd Largest Investor
      ScaleVP:
    • 27. 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) Financial Data as of 9/30/08 pro forma Financial Data as of 9/30/08 2000 2002 2004 2006 2008
    • 28. ScaleVP Among Top Venture Firms for Exits 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. Rank Firm # of Deals >$200M Value Created ($Ms) 1 KPCB 9 $185,067 2 Sequoia Capital 12 $184,597 3 TA 6 $12,424 4 Accel 12 $11,547 5 Battery Ventures 9 $10,210 6 NEA 16 $8,853 7 Madison Dearborn 3 $7,776 8 Benchmark 12 $7,212 9 Warburg 6 $6,512 10 Domain 16 $6,278 11 Venrock 9 $4,003 12 Menlo Ventures 8 $3,893 13 JP Morgan 5 $3,785 Rank Firm # of Deals >$200M Value Created ($Ms) 14 DFJ 3 $3,770 15 Foundation 6 $3,751 16 Apax 6 $3,734 17 Greylock 7 $3,670 18 ScaleVP 8 $3,626 19 Charles River 6 $3,567 20 Versant 10 $3,565 21 Vertical Group 1 $3,562 22 TCV 8 $3,534 23 Globespan 4 $3,533 24 Sprout 6 $3,484 25 August Capital 4 $3,479 All Deals Post-Bubble 2003-2007
    • 29. 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:
        • [email_address]
      • Web:
        • www.scalevp.com