US Venture Capital - Realistic Optimism


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A review of the current state of US Venture Capital.

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  • Mile stretch between Menlo Park and San Jose Stanford, Google Step One Ventures is right in the middle of Silicon Valley Sand Hill Road is where most of the VCs are in Silicon Valley As you can see Stanford is right nearby
  • There were 2 presentations recently that “shook the vc and startup world” – worth mentioning Sequoia presentation given in mid-October Given to their portfolio companies and became infamous VC model is dead presentation given in mid-November Given to the HBS faculty by’s founder
  • 2 nd presentation VC industry is simply going through a much needed restructuring There is a permanent structural imbalance in VC industry and leads to the feast or famine model In general too much money and too many firms in VC industry but that is true of many asset classes like private equity and real estate Some firms will make it and some won’t = smaller VC industry
  • Optimism remains as VCs vow to cautiously “stay the course” -> manage costs to become cash-flow positive The US government is expected to be highly supportive of VC, especially clean-tech -> stimulus plan; Obama to create 25 million jobs, spend 500-700 BN
  • What are the VCs doing? 1Q: $7.8BN invested – 990 deals 2Q: $7.6 BN – 1033 deals 3Q: $7.1BN – 907 deals, a decrease of about 7% from last quarter Compared with around $4BN in 2002-2003 Obviously 3Q compared with last year 3Q is worse: down 9% from then VC investing longer in companies so investments might decrease
  • Many of the famous companies now were started in the previous downturn Silver lining: if can survive now, big advantage = less competition Good investing: better valuations for vcs and less competition
  • Also, cleantech! Institutional investors don’t make decisions on quarterly outlooks but instead look at longer-term macroeconomic, regulatory, market, and consumer trends Funds have been raised recently that focus on cleantech: Kleiner Perkins Caufield & Byers created a $500 million “green growth fund” RockPort Capital Partners created a $450 million fund focusing solely on cleantech Carbon: Planet metrics – Carbon View
  • US Venture Capital - Realistic Optimism

    1. 1. US Venture Capital – Realistic Optimism <ul><li>June 29, 2009 </li></ul>
    2. 2. S tepOne’s US Office is In Silicon Valley… Sand Hill Road Step One Ventures Stanford University
    3. 3. … A nd we’ve seen the worst of it Sequoia Capital Oct 10, 2008 Oct 2008
    4. 4. I T Services Have Been Hit as Companies Cut Back Budgets $M <ul><ul><li>IT funding is highly correlated with the economy </li></ul></ul><ul><ul><li>IT spending is highly scrutinized in a down economy </li></ul></ul><ul><ul><li>Depressed earnings expectations from comparable companies push down valuations for startups </li></ul></ul>Source: PWC MoneyTree Report US VC Funding in IT Services by Quarter
    5. 5. E ven Life Sciences Has Had Less Funding Source: PWC MoneyTree Report <ul><ul><li>Bio-tech, as a sector, is more resistant to downturns </li></ul></ul><ul><ul><li>Less funding = less $$ available in VC </li></ul></ul><ul><ul><li>Recent large deals between public pharma and biotech companies indicate significant sector potential </li></ul></ul>$M US VC Funding in Biotech and Med Devices by Quarter
    6. 6. C leantech Remains One of the Few Bright Spots Source: Ernst & Young and Dow Jones Venture Source <ul><ul><li>Cleantech is still a high growth industry; although many predicted a bubble in 2008 </li></ul></ul><ul><ul><li>Latest data indicates a sharp downturn in funding (63% $ decrease YoY in Q1 2009) </li></ul></ul><ul><ul><li>Solar, alternative fuels, and energy efficiency were the three largest funding categories in 2008; Battery technology led funding in Q1 2009 </li></ul></ul>$M US VC Funding in Cleantech by Year
    7. 7. V Cs Will Strive to Fix a Broken Investing Model
    8. 8. S tartups Will Try to Survive
    9. 9. T oday’s views <ul><ul><li>Optimism remains as VCs vow to cautiously “stay the course” </li></ul></ul><ul><ul><li>The US government is expected to be highly supportive of VC, especially clean-tech </li></ul></ul><ul><ul><li>Important lessons from the 2001 bubble burst are being applied to today </li></ul></ul><ul><ul><li>Certain verticals will remain hot (e.g., clean-tech, transaction processing, mobile applications and components) </li></ul></ul>
    10. 10. V C Investing in Context <ul><li>Remained within historical norms even with market turmoil </li></ul><ul><li>Likely will see impact in next quarters – Q12009 VC funding was down 60% YoY from Q1 2008 </li></ul>
    11. 11. W hy is there any optimism? <ul><li>“ It is reasonable to be optimistic for 2010” </li></ul><ul><li>-Eric Schmidt, Google CEO </li></ul><ul><li>Cisco has made 10 acquisitions in the past year </li></ul><ul><li>Roche, Applied Bio, Schering-Plough indicate that there is still acquisition money available for Life Sciences / good companies </li></ul><ul><li>1930s: General Electric grew </li></ul><ul><li>1970s: Apple and Microsoft grew </li></ul><ul><li>2000s: Google grew </li></ul>Corporate Support History On Our Side
    12. 12. S ome investing areas to note <ul><li>Cleantech </li></ul><ul><ul><li>Energy alone is a $6 trillion market, compared to $100 billion for the Internet </li></ul></ul><ul><ul><li>Obama calling for creation of 5M green jobs </li></ul></ul><ul><ul><li>Energy bill likely to be passed in Obama’s first term, initiating a nation-wide cap-and-trade regime </li></ul></ul><ul><ul><li>Several funds focused only on cleantech </li></ul></ul><ul><li>Other Attractive Areas </li></ul><ul><ul><li>Time and Cost reduction, (e.g. BPO, SaaS) </li></ul></ul><ul><ul><li>Transaction processing / Micropayments </li></ul></ul><ul><ul><li>iPhone / Mobile Applications </li></ul></ul><ul><ul><li>Niche businesses </li></ul></ul>
    13. 13. 120.000