0
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 E...
Investment Outlook




Copyright 2008 Scale Venture Partners   Confidential   3
Context for Current Economy


!      2000: Tech Bubble: Silicon Valley Exported Its Irrational Exuberance
       to Wall S...
VC Market Environment More Rational Than 2000


                                        2000                   2007


    ...
Economic Contagion More Dangerous Today


                                        2000                   2007

      !    ...
Risks In Today’s Economy
!      Venture-backed Company Execution
          – Execution, Clinical, Product Risks

!      Im...
Business Exposure to Changes in GDP


                                      Exposed: Consumer Products,
                  ...
Financing Risk


!      See Sequoia Slides… http://tinyurl.com/3erkjz
!      Better Since 2000 – Industry Burnt Once…
    ...
Deployment of Dollars in 2009
     Where? How?




Copyright 2008 Scale Venture Partners   Confidential   10
Bulk of Dollars Into Expansion & Later Stage Deals
Investments By Stage – Q3 2008




         Total Amount Invested ($B)
...
…But Early Stage Companies Being Funded
Q3 2005 – Q3 2008




   Number of investments by stage


                        ...
Software, Biotech, Medical Devices Dominate
Investments By Industry – Q3 2008




     IT Investments ($M)
               ...
Clean Tech Investment Remains Strong
 Q3 2005 – Q3 2008




    Internet-Specific Investments ($M)
                       ...
Less Investment – Better Risk/Reward Balance
!    VC’s Will Have Less Money to Spend
        – More Allocated to Reserves
...
Exit Environment




Copyright 2008 Scale Venture Partners   Confidential   16
Venture Exit Counts - IPOs and M&A by Year


                     700
                     600            M&A
            ...
IPO Exit Environment – Market Feedback


!      86 IPO’s in 2007 – High Water Mark until 2010
          – But 2010 is Expe...
Long Term Outlook




Copyright 2008 Scale Venture Partners   Confidential   19
Venture Backed Companies Lead the Economy

             Tech & Healthcare Companies
             !      Amgen
            ...
What Does History Tell Us?
!      IBM During Great Depression
                               70                           ...
Venture Capital Summary

!      Venture Is Not Dead
!      Innovation Expected to Lead US Economy Out of Recession
!      ...
A Letter to Venture-Backed CEOs




                                        “don't forget that
                           ...
Scale Venture Partners




Copyright 2008 Scale Venture Partners   Confidential   24
About Scale Venture Partners

!    Formed in 2000
!    Invest in Technology & Healthcare
!    Invest Throughout U.S. – 50%...
Investing in the Middle of the
   Risk-Reward Continuum

                                         We Invest Early in a Com...
Consistent Track Record of Quality
Exits Has Built Reputation and Network

                              Over $8.6B in Val...
ScaleVP Among Top Venture Firms for Exits
                                                              All Deals Post-Bub...
Scale Venture Partners


!      Contact:
          Scale Venture Partners
          950 Tower Lane, Suite 700
          Fo...
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ScaleVP Marketview Dec2008

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A market view for entrepreneurs outlining the current venture capital funding environment and providing insight for managing growth through a downturn in the economy.

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Transcript of "ScaleVP Marketview Dec2008"

  1. 1. VC Market Update for Entrepreneurs December 2, 2008 Copyright 2008 Scale Venture Partners Confidential 1
  2. 2. Agenda ! Investment Outlook – Impact of Recession ! Deployment of Dollars in 2009 – Where & How? ! Exit Environment ! Long Term Outlook ! Scale Venture Partners Copyright 2008 Scale Venture Partners Confidential 2
  3. 3. Investment Outlook Copyright 2008 Scale Venture Partners Confidential 3
  4. 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 Copyright 2008 Scale Venture Partners Confidential 4
  5. 5. VC Market Environment More Rational Than 2000 2000 2007 ! $104 BN Raised ! $35 BN Raised ! 264 IPO’s – Most Unprofitable ! 86 IPO’s - Most Profitable ! 7903 VC Investments ! 3931 VC Investments ! Nasdaq Peak: 5048 ! Nasdaq Peak: 2859 ! Nasdaq PE at Peak 64+ ! Nasdaq PE at Peak 22 ! Nasdaq Peak to Trough: ! Nasdaq Peak to Current: ! Down 80% ! Down 50% Copyright 2008 Scale Venture Partners Confidential 5
  6. 6. Economic Contagion More Dangerous Today 2000 2007 ! S&P Peak to Trough – 50% ! S&P to Date Down 42% ! Worst Sector - Technology ! Worst Sector - Financials ! No Real Systemic Risk ! Clear Systemic Risk ! 9/11 External Threat Drove ! Subprime First Leg Second Leg ! De-leveraging Second Leg ! Result “Typical” Post War GDP ! Global Recession Third Leg Decline: Sub 2% ! 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 Copyright 2008 Scale Venture Partners Confidential 6
  7. 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 Copyright 2008 Scale Venture Partners Confidential 7
  8. 8. Business Exposure to Changes in GDP Exposed: Consumer Products, Brand Advertising, Elective Surgery Resistant: Open Source, Virtualization, Low Cost Recurring Revenue Models Immune: Cure Cancer , Cost Saving Non-Elective HC Services Confidential 8
  9. 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 Copyright 2008 Scale Venture Partners Confidential 9
  10. 10. Deployment of Dollars in 2009 Where? How? Copyright 2008 Scale Venture Partners Confidential 10
  11. 11. Bulk of Dollars Into Expansion & Later Stage Deals Investments By Stage – Q3 2008 Total Amount Invested ($B) $8 $7 $3.0 $2.8 $3.2 Last Four Quarters $6 $3.1 $3.3 $2.5 $2.4 $3.2 $2.8 $2.1 $5 $2.8 $2.3 23% $3.0 $4 39% $3.1 $3.3 $3 $2.4 $3.1 $2.6 $2.7 $3.3 $3.0 $2.6 $3.1 $2.3 $2.6 38% $2 $1.7 $1 $1.6 $1.8 $2.0 $1.7 $1.8 $1.7 $1.2 $1.1 $1.1 $1.2 $1.4 $1.3 $1.5 $0 Q3'05 Q4'05 Q1'06 Q2'06 Q3' 06 Q4 '06 Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Q3'08 Seed/Early Stage Expansion Later Stage PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report Based on Data from Thomson Reuters Confidential 11
  12. 12. …But Early Stage Companies Being Funded Q3 2005 – Q3 2008 Number of investments by stage 309 320 299 334 224 314 278 236 294 274 271 258 276 307 347 333 329 321 339 312 360 263 327 286 241 294 375 420 382 378 329 357 362 350 272 256 271 307 306 Q3'05 Q4'05 Q1'06 Q2'06 Q3' 06 Q4 '06 Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Q3'08 Seed/Early Stage Expansion Later Stage PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report Based on Data from Thomson Reuters Confidential 12
  13. 13. Software, Biotech, Medical Devices Dominate Investments By Industry – Q3 2008 IT Investments ($M) $1,343 IT $2,835.7 Mil $403 $396 $323 $178 $120 $73 Software IT Services Semiconductors Telecom Networking & Electronics & Computers & Equipment Instrumentation Peripherals Life Sciences Investments ($M) $1,350 $896 LS $2,301.9 Mil $56 Biotechnology Medical Devices and Healthcare Services Equipment PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report Based on data from Thomson Financial Confidential 13
  14. 14. Clean Tech Investment Remains Strong Q3 2005 – Q3 2008 Internet-Specific Investments ($M) 300 $1,644 $1,401 $1,352 250 $1,182 $1,088 $1,226 $1,256 200 $1,002 $998 $1,061 $1,057 $763 $836 150 100 50 0 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 Clean Tech Investments ($M) 70 $1,172 $1,036 60 $886 $887 50 $708 40 $578 $508 $470 30 $289 $377 $245 20 $112 $123 10 0 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 Copyright 2008 Scale Venture Partners Confidential 14
  15. 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 Copyright 2008 Scale Venture Partners Confidential 15
  16. 16. Exit Environment Copyright 2008 Scale Venture Partners Confidential 16
  17. 17. Venture Exit Counts - IPOs and M&A by Year 700 600 M&A 500 IPO Number of Issues 400 300 200 100 0 '08 91 92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05 '06 '07 9 mo M&A 17 76 74 100 98 118 172 221 248 327 388 341 299 351 371 387 361 220 IPO 156 181 220 166 202 270 136 77 260 264 41 22 29 93 57 57 86 6 Year Source: Thomson Reuters & NVCA Confidential 17
  18. 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” Copyright 2008 Scale Venture Partners Confidential 18
  19. 19. Long Term Outlook Copyright 2008 Scale Venture Partners Confidential 19
  20. 20. Venture Backed Companies Lead the Economy Tech & Healthcare Companies ! Amgen ! Tech Sector is 18% of S&P ! Apple ! Boston Scientific ! Healthcare is 14.3% of S&P ! Cisco ! Venture Backed Companies Represent 18% of US GDP ! Genentech ! Genzyme ! Job Growth 2-1/2x the Market ! Google ! Intel ! Microsoft ! Oracle Copyright 2008 Scale Venture Partners Confidential 20
  21. 21. What Does History Tell Us? ! IBM During Great Depression 70 350 60 300 50 250 40 200 IBM Annual Revenue ($M) 30 150 GDP ($B) 20 100 10 50 0 0 ! 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 Copyright 2008 Scale Venture Partners Confidential 21
  22. 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 Copyright 2008 Scale Venture Partners Confidential 22
  23. 23. A Letter to Venture-Backed CEOs “don't forget that surviving is not winning, and winning requires more than cutting.” Copyright 2008 Scale Venture Partners Confidential 23
  24. 24. Scale Venture Partners Copyright 2008 Scale Venture Partners Confidential 24
  25. 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 Copyright 2008 Scale Venture Partners Confidential 25
  26. 26. 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 Financial Data as Scale Venture Partners Copyright 2008 of 9/30/08 Confidential 26
  27. 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) 2000 2002 2004 2006 2008 Financial Data as of 9/30/08 pro forma CopyrightData as of 9/30/08 Partners Financial 2008 Scale Venture Confidential 27
  28. 28. ScaleVP Among Top Venture Firms for Exits All Deals Post-Bubble 2003-2007 Value Value # of Deals Created # of Deals Created Rank Firm >$200M ($Ms) Rank Firm >$200M ($Ms) 1 KPCB 9 $185,067 14 DFJ 3 $3,770 2 Sequoia Capital 12 $184,597 15 Foundation 6 $3,751 3 TA 6 $12,424 16 Apax 6 $3,734 4 Accel 12 $11,547 17 Greylock 7 $3,670 5 Battery Ventures 9 $10,210 18 ScaleVP 8 $3,626 6 NEA 16 $8,853 19 Charles River 6 $3,567 Madison 20 Versant 10 $3,565 7 3 $7,776 Dearborn 21 Vertical Group 1 $3,562 8 Benchmark 12 $7,212 22 TCV 8 $3,534 9 Warburg 6 $6,512 23 Globespan 4 $3,533 10 Domain 16 $6,278 24 Sprout 6 $3,484 11 Venrock 9 $4,003 25 August Capital 4 $3,479 12 Menlo Ventures 8 $3,893 13 JP Morgan 5 $3,785 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. Copyright 2008 Scale Venture Partners Confidential 28
  29. 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: Businessplan@scalevp.com ! Web: www.scalevp.com Copyright 2008 Scale Venture Partners Confidential 29
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