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Funding A Technology Start Up Insights Into The World Of Venture Capital

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  • IT/Consumer had massive investment in late 90s. Volume and distribution has dropped significantly over time. Life Sciences has been more stable over time Industrial/Energy spiked more recently, although lack of capital efficiency scared some off in 2009 - Retailing/Distribution has practically disappeared as a category - Financial Services has dropped as well
  • - Focus by sector, stage and geography
  • Transcript

    • 1. “ Funding a Technology Startup – Insights into the World of Venture Capital” Tom Weithman Managing Director, CIT GAP Funds Remarks to Capital Technology Management Hub November 10, 2009
    • 2. Overview
      • What VC Is … How It Works
      • Changes in Venture Capital
      • What It Means for Regional Start-Ups
    • 3. What Is Venture Capital?
      • Private Equity Class Focused on Funding and Building Early Stage, High-Growth Enterprises
    • 4. Sources of New Venture Financing
      • Self, Friends, and Family
      • Federal Government Grants & Contracts
      • Business Angels
      • Venture Capital 2008 Volume: $28.4B Invested in 3832 Deals
      • Small Business Investment Companies (SBICs)
      • Trade Credit and Factoring
      • Asset-based Lending
      • Mezzanine Capital
      • Private Placements of Equity (Relational Investors)
      • IPOs
      • Public Debt
    • 5. VC Fund Structure Asset Allocation Alternative Assets Capital Call Carried Interest Management Fee Fund Life Deployment Period Key Concepts Illustration Source: Wikipedia
    • 6. Why do VCs Invest?
      • Create Extraordinary Returns for the General Partnership and its Limited Partners
        • Compensation for Illiquidity, Technology Risk and Business Risk
      • Large Multiple “Exit” or “Liquidity Event” that Transforms Ownership into Financial Return
        • M&A or IPO at 5-15X within 3-5 Years
        • Multiple Offsets New Venture Risks
    • 7. What Do VCs Invest In? Source: MoneyTree Report – NVCA/PWC/Thomson Reuters
    • 8. Venture Capital Outcomes - NVCA
      • Big Name VC-Backed Companies
      • Returns, 1988-2008
        • 17.0% Annualized IRR - All VC Funds
        • 21.6% Annualized IRR – “Early Stage” Funds
      • VC-Backed Companies Spill-Overs, 1970-2005
        • 10M Jobs
        • 17% of GDP
    • 9. Major Changes in Venture Industry
      • Exit Markets and Liquidity
      • Near-Term Liquidity Problems Throughout the VC Food Chain
      • Cyclical Depression of M&A Market
      • Long-Term Structural Impediments to IPO Market
      • Institutional Investment Patterns
      • Shrinking Allocations to VC
      • Increasing Concentration of VC in Fewer Firms
      • Impact to VC Industry
      • Exit of Established Funds from Industry
      • Growth of “Mega-Funds” – National and International in Scope
      • Diminished Capacity to do Seed-Early Stage Investment
    • 10. Institutional Investment Patterns
      • Portfolio Allocation, 1998-2008
      • Increased Allocation to Illiquid “Alternative Assets” – e.g., VC,LBO (4X+ Increase, 1998-2008)
      • Concentration of Funds in Fewer VCs
      • “ Flight to Quality”
      • Larger Fund Sizes
      • Abetted by VC Compensation Model
      • Average VC Fund Sizes
        • 1Q99: $112M
        • 1Q09: $250M
    • 11. Proliferation of Private Equity
    • 12. VC Investment Patterns
      • Proliferation of VC Funds, Post 1999
        • Valuations Bid Up
        • Exit Multiples Pushed Down
      • Trend Toward Larger Funds and Capital Deployments
        • Fostered by VC Fund Management Comp Model
        • Discouraging of Early-Seed Investing
          • Seed/Early Stage Deals: 35% of 1Q99 VC Dollars v 18% in 1Q09
      • Lower Valuations
        • Mean Round Valuations 2008: $46.7M v Preceding 14 Years: $72.9M
      • Concentration in “Maturing” Tech Sector
        • Open Source, Off-shoring, Affordable Bandwidth, Internet-Based Marketing
        • Decreasing Capital Requirements
        • Substandard Returns
    • 13. “ IPO Market Impairments” “ Why are IPOs in the ICU?” by David Weild and Edward Kim, Grant Thornton, 2009
    • 14. “ The Great Recession” – Immediate Impacts
      • VC Portfolio Consequences
      • Protracted Customer Buying Cycles
      • Longer Lead Follow-On Financings
      • Emphasis on Lowering Burn
      • Depressed Exit Climate for VC-Backed Companies - 2008
      • “ IPO-Free” Quarter – 2Q08 – First Time in 30 Years!
      • IPO Volume (6) Lowest Since 1970s
      • M&A v 2007
        • Volume (335) Dropped 11%
        • Disclosed Proceeds Dropped 59%
    • 15. “ The Great Recession” – Long-Term Impacts
      • Institutional Portfolio Consequences
      • “ High-Alternative” Allocation Strategy Compromised
        • Disproportionately Large Illiquid Holdings
        • Need to Cash to Cover Capital Call Obligations on LBO Funds
      • Sell-Off of Illiquid Holdings Forces Value Declines
      • Future Allocations to All Alternatives Likely to Suffer
        • Decreased VC Investment
        • Concentration in Smaller Number of Funds
    • 16. For Entrepreneurs …Take-Away #1
      • Partnering with VCs will Be Challenging …
      • Entrepreneur’s Cost-of-Capital for VC Will Increase
      • VC Will Be Harder to Raise Than Ever
      • Seed/Early Stage Funds Will Be Hardest of All
      • But VC will Survive …
      • Large Funds will Offer Extraordinary Reach and Firepower
      • Non-Traditional Funds will Offer New, but Different Capacity
      • New Sector Cultivation – e.g., CleanTech
    • 17. For Entrepreneurs … Take-Away #2
      • You Are in a Great Place to Build a Business
      • Strong Regional Economy
      • 4th largest economy in US
      • > Gross Regional Product = $454 billion
      • Federal Government Foundation
      • #1 in the world for government research & development spending per capita
      • > More than 50 federal labs focusing on science & technology
      • > Federal procurement of goods and services = $66.5 billion, the most in the US
      • Innovation and Entrepreneurship
      • Home to the most Inc. 500 fastest-growing companies in the US — for 12 consecutive years
      • > Nearly $6.9 billion of venture capital invested in regional companies from 2002–2008
      • Talented, Highly-Educated Workforce
      • Higher concentration of knowledge workers than any other major US metropolitan region
      • > #1 in the US: 47% of workforce has Bachelor’s degree; 22% has advanced degree
      • > Home to 6 of top 8 counties in nation with highest per capita college degrees
      • Strong Entrepreneurial Support Structures
      • CIT, NVTC, MAVA, Maryland TEDCO
      • Growing base of experienced entrepreneurs and service providers
    • 18. For Entrepreneurs … Take-Away #3
      • Venture Capital Does Not Equal Innovation
      • Cash
      • Angels Investment
      • Bootstrapping
      • Debt
      • Federal Grants and Contracts
      • Guidance and Support, Access, Credibility
      • Board of Directors or Advisors
      • Seasoned Management Team
      • Blue-Chip Customers
      • Channel Partnerships and Strategic Alliances
    • 19. “ Funding a Technology Startup – An Insight into the World of Venture Capital”
      • Objectives Revisited
      • The Role of VC’s and the VC landscape
      • VC Business Models
      • Flavors of VC Investments
      • VC’s Investment Criteria and Objectives
      • Typical Investment Lifecycle
      • Main Players in the DC Metro Area
      • The Uniqueness of the DC Area
      • Opportunities Created by Federal Stimulus
    • 20. Back-Up Slides
    • 21. Factors Impacting IPO Market
      • From 1991-97, 80% of IPOs were under $50M. By 2000, this declined to less than 20%
      • Key Factors
      • 1996 On-Line Brokerage Proliferates - Beginning with Charles Schwab, on-line brokerages usher in unprecedented levels of individual investment in stock market, erode margins of traditional retail brokerage houses, and push participants our of commission-based brokerage business
      • 2001 Decimalization ; SEC mandates that price changes be expressed in penny increments v fractions. The result was a savings on brokerage fees for consumers but significantly higher participation in arguably speculative investment activity. Wall Street’s sell-side research capacity is gutted.
      • 2002 Sarbanes Oxley increases time and expense to go public
      • 2003 Global Research Analyst Settlement Ruling requires Investment Bankers to insulate research analysts from investment banking transactions. Result has been that a larger number of co-managers and bookrunners must participate in transactions to guarantee research coverage.
    • 22. VC Performance v Committed Capital
    • 23. VC Performance V Investments
    • 24. Institutional Commitment to PE Bill Gurley, “What Is Really Happening to the Venture Capital Industry?”, abovethecrowd.com, posted August 24, 2009
    • 25. Proliferation of Venture Capital
    • 26. VC Capital Under Management, 1988-2008
    • 27. Source: University of New Hampshire Center for Venture Research, Price Waterhouse Coopers Early Stage Private Equity 2007 Angel Investments 2007 VC Investments $25+ Billion 51,000 Deals Average Deal Size : $500,000 $25+ Billion 3,416 Deals Average Deal Size : $7,500,000 Early Stage to Late Stage
    • 28. Where Do VCs Invest? Life Sciences Clean Technology Information Technology
    • 29. Brief History of VC
      • 1492 – Ferdinand & Isabella Fund Columbus
      • Post WWII
      • 1946 - American Research & Development (ARD) Corporation
      • J.H. Whitney – Minute Maid Orange Juice
      • Rockefeller Family – Eastern Airlines
      • 1957 – Federal SBIC Program
      • 1960s – Bull Market
      • 1970s – Market Slump; Legislation Against Pension Fund Abuses
      • 1980s – Capital Gains Rate Tax Cut
        • -- Bars to Pension Fund Investment Lifted
      • Prominent IPOs – FedEx (1978), Apple (1981), Genentech (1981)
      • Bubble
      • Post-Bubble
    • 30. Investment Stage and Expected Return
      • Seed Financing (80%)
        • Lone Inventor / Entrepreneur
        • Small Amount of Capital for “Proof-of Concept”
        • Early Product Development, Market Research, Team Formation
      • Start-Up Financing (60%)
        • Capital to complete Product Development and Initial Marketing
        • Pre-Commercial Launch
        • Key Management and Business Plan in Place
      • First-Stage (50%)
        • Capital for Full-Scale Manufacturing and Sales
        • Pre-Profit
      • Second-Stage (40%)
        • Working Capital for Initial Expansion
        • Producing and Shipping Product
        • Pre-Profit to First Profits
      • Third-Stage, Mezzanine (30%)
        • Capital for Major Expansion
        • Needs for Plant and Equipment, Marketing, Working Capital
      • Bridge Financing (25%)
        • Pre-IPO
      Time-to-Liquidity Investor’s Expected Return Technology Risk Business Risk Entrepreneur’s Cost of Capital High Low
    • 31. VC Deal Structure
      • Preferred Stock
      • Key Terms
      • Valuation
      • Liquidation Preference
      • Option Pool
      • Board Representation
      • Anti-Dilution
      • Redemption and Dividends
      • Protective Provisions
    • 32. VC Today … Facts, Rumors, and Allegations?
      • VC Returns Not Rewarding Investors …
        • Low Exit Values
        • Delayed Realizations
        • Total Ten-Year Returns will Go Negative in 2010
      • Larger Fund Sizes Pushing Out Early Stage Investment
      • Established Funds Exiting the Business
      • “ VC Compensation Does Not Incentivize Results!”
      • “ The Venture Capital Model is Broken!”
    • 33. Why Entrepreneurs Raise Venture Capital
      • Guidance & Support
        • Board Participants - Interim Executives
        • Product Management, Business Development and Financial Planning
      • Access
        • Industry Contacts
        • Leverage Portfolio
      • Credibility
        • Stamp of Approval with Customers, Partners and Vendors
      • Cash
    • 34. For Entrepreneurs Seeking VC …
      • Does Your Plan Fit the Needs of the Venture Capital Fund?
      • Are You Ready For Venture Capital?
      • Are You Prepared to Become a Minority Stockholder?
      • Can Your Target VCs Add Value?
      • Are You at the Front End of the VCs Deployment Period?
      • Are the VCs Compensation and Return Arrangements Aligned with Yours?
      • Have You Spoken with Other Portfolio Company CEOs?
      • Do Guidance, Access, and credibility Provided Justify the High Cost of Capital Incurred?
    • 35. Alternatives to VC?
      • Cash
      • Angels Investment
      • Bootstrapping
      • Debt
      • Federal Grants and Contracts
      • Guidance and Support, Access, Credibility
      • Board of Directors or Advisors
      • Seasoned Management Team
      • Blue-Chip Customers
      • Channel Partnerships and Strategic Alliances
    • 36. Washington Metro Area Strengths
      • Economic Strength and Stability
      • 4th largest economy in US
      • > Gross Regional Product = $454 billion
      • > Consistent, steady GRP growth over last two decades; CAGR = 3.6%
      • > 1st nationally in net new job growth over last decade
      • Federal Government Foundation
      • #1 in the world for government research & development spending per capita
      • > More than 50 federal labs focusing on science & technology
      • > Federal procurement of goods and services = $66.5 billion, the most in the US
      • > Average annual procurement growth rate since 1988 = 11%
      • Innovation and Entrepreneurship
      • Home to the most Inc. 500 fastest-growing companies in the US —
      • for 12 consecutive years
      • > Top 20 venture capital firms have $17 billion under management
      • > Nearly $6.9 billion of venture capital invested in regional companies from 2002–2008
      • Talented, Highly-Educated Workforce
      • Higher concentration of knowledge workers than any other major
      • US metropolitan region
      • > #1 in the US: 47% of workforce has Bachelor’s degree; 22% has advanced degree
      • > Home to 6 of top 8 counties in nation with highest per capita college degrees

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