Earlybird Europe Venture Capital Report

Turning Venture CapitalData into Wisdom:Why Deal Performancein Europe is nowOutpacing the US— July 2011Hendrik Brandis Jason WhitmireManaging Partner, Earlybird Venture Capital General Partner, Earlybird Venture Capital

BackgroundThe core data-slides in this Report (6, 7, This Report was further endorsed by8, 11, 15, 17, 18, 23, 24, 25, 26, 27, 28, 30, 31) 24 active venture capital firms inwere created and supported by a broad Europe including Index Ventures,cross-section of partners at European VC Wellington Partners, Fidelity Growthfirms who are members of the Venture Europe, Prime Technology Ventures,Council at the European Private Equity Hummingbird Ventures, Open Ocean,and Venture Capital Association (EVCA). Target Partners, Vodafone Ventures,These VCs include Sofinnova, Northzone, and many more.DFJ Esprit, Amadeus Capital, Gimv,Endeavour Vision, Delta Partners,Advent Venture Partners, Nauta Capital,Neuhaus Partners, Finlombarda, andEarlybird Venture Capital. 02

After emerging only in the 1990s, and shaking off the hangover from the deluge of capital that flooded the market in 1999–2001, European Venture Funds have staged aComeback 03

Venture- backed liquidity events in the last 24 months:$15 Billion *Equal to 50% of the 30Bn in US Venture-backed liquidity events in 2009 & 2010 (Thomson Reuters), yet with only 1/5 of the venture funding i.e., $25Bn invested in US VCs in 2009 & 2010 compared to $6Bn in Europe, according to NVCA and EVCA data. * 04

In other words, more checks to LPs arebeing written in Europe than ever before t Ex a l d To Publicly i te announced European $4. 4 Venture Venture venture-backed invested* $Bn Exits*/** $Bn $3. trade sales and 9 IPOs over the past 24 months (incomplete) $3 $2. 5 ve l In ota ed $1. st T 4 $1. 1 $0. 8 $0. 6 Eu he Eu he Ge Fr rro r)) rm ((O an op Ott UK pe ce an e y **Source: Earlybird analysis, 2011. ** Remaining Europe includes Scandinavia, Benelux, Italy, Spain, Central & Eastern Europe. † Exchange rate used for 2010 1€ = $1.3265 05

At the same time, real performance showsEuropean VC driving the best exit multiplesgloballyExits over $ 100M2005 – Q1/2011 7.2 Median Multiple of Cash Invested 4.5 Median Multiple of Cash InvestedProportionally Europe is producing higher exit multiples and, although average exit values are ca. 25% smaller, lower entry valuations and higher capital efficiency Europe USAovercompensate for disadvantages in exit value. Number 131 596 Valuation Median Exit Valuation $173M $236M % with Multiple of Cash ≥ 5 57.26% 5 47.27% Data based on exhaustive calculation of exit values and cash multiple of all exits reports in VentureSource database (Dow Jones VentureSource) 06

This outperformance is based onan overproportional share in 41%successful exits in Europe...Overview US- vs. European 36%Share in VC Value 59%Contribution, since 2004 22% 64% 78% 18% Eu ro e p its . ex no of tal 82% To nv x e . I 10 om te p es ca vs ns: f H d o Ru o. N US A 13 45 10 its 0m $ ex US of > o. N 07 ed l st ita Source: Dow Jones VentureSource ve ap in l c ta To

…Due in part to a higher share of EuropeanVC funds with top US quartileperformanceActive GPs Managing 100%Funds of Vintage≥ 2006, Investment nds und sGrade Funds 25% rt il e Fu 23% ua rti le F Qua Q tom ttom Bot Bo 25% 17% nd s Fu nds Q3 Fu Q3 25% nd s 25% s Q 2 Fu nd Q 2 Fu 25% le 35% rtile arti Qua Q u Top Top % f be ain otal of nc st t Fun % s R un i Fu art Tot Qu 37 EU hm he ds of in ank ds nd ile al F ag 69 T VC ar US US US in VC VC gs fu ked 3 nd s Source: Prequin 2010 08

Forgetthecharts,where are the outsized venture exits in Europe? 09

Its not quite all about Skype… $1B+ > 10X 5 – 10X Coding Technologies ** …and many more 010 *Includes 14 venture backed $1Bn exits and 30 other deals generating a ≥10x multiple, since 2005; does not include another 30 exits generating 5x-9x multiples. ** Enterprise value following exit to Groupon. Source: Dow Jones VentureSource and Earlybird Venture Capital

…while European VC–backed IPO performancematches or exceeds US performance, both pre–as well as post–IPOUS vs. Europe, post-IPO performanceof all VC-backed IPOs*, 03/04 to 07/11 Europe IPO200% - Index Value150%100% U.S. IPO50% - Index Value 0 2004 2005 2006 2007 2008 2009 2010 2011 *NB excludes Google Source: CapitalIQ, DFJ Esprit 11

On the origin of theturnaround An entrepreneurial boom combined with a mature seed/angel/venture ecosystem has led European early-stage companies to scale faster and accrue more value sooner than ever before. Starting in the year 2004, the fundamentals for a break-out venture decade in Europe have been continuously improving, while venture capital fund commitments have remained down for last 6 years (positive contra-indicator) leading to a dramatic demand-supply in-equilibrium of available capital. 12

Europe today has the largestinequilibrium of venture Capitalavailability on the planet Supply-Demand Ratio European Venture Capital Market still saturated with Supply of Capital pre-bubble VC funds 100 65 % of all VC funds slide to Current Immediate drop in oblivion supply 75 venture deal flow Droves of entrepreneurs Exit boom starting in 2005 gap by 50% run for the started to drive Major gap in supply of woods after up demand venture capital vs. bubble burst availability of deals50 Demand25 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Earlybird 13

Supply side: Natural selection“Almost every bank, large corporation and insurance company in Europe created its own venture capital fund in 1999–2000; What has emerged from the post-bubble struggle for existence is nothing less than some of the strongest Venture Capital firms in the world.” —John Holloway, European Investment Fund 14

While the supply of venture capital started to dryout only after 2004 ...Early-Stage VCFundraising Europe* Investment cycle Inve st cyc ment le 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 € 1260 M € 5063 M € 8624 M € 5586 M € 2177 M € 1548 M € 1345 M € 3542 M € 2927 M € 3585 M € 2265 M € 1465 M € 811 M 15 *1998-2006: Thomson Financial/PWC statistics, High-Tech Early-Stage; 2007-2010: PEREP Analytics, Early-Stage Source: EVCA

…Only the fittest venture capital firmssurvived the post-bubble shake outNumber of VC Funds in GermanyEurope 1999 vs. 2011* UK 1,60 0 - 63% France Thereof the Top 20 VCs in Europe Other 711 19 99 20 11 16 *Active Funds = all VC funds, doing ≥ 4 investments per year. Sub-set of so-called “Investment Grade Funds”: US$ 100M; > 50% non-captive capital; raised successor fund with vintage year ≥ 2006 Source: NVCA; EVCA; Earlybird Estimates

The dramatic capital supply imbalancebetween the US and Europe(which receives only onefifth of VC Investments) …VC Investments in Proportionto GDP (2010) U.S. 0.150 x 5.8 Europe 0.026 Scandinavia UK Switzerland France Ireland Germany Benelux Austria Spain CEE Italy Portugal Poland 0.051 0.045 0.042 0.035 0.027 0.026 0.022 0.014 0.011 0.007 0.004 0.003 0.003 Source: EVCA, Eurostat 2011 17

…Has meant that a comparatively smallbut mature sub-set of European VCs are able tonow move into fund generations 3 and beyondVC teams’ maturity by number of funds raised W. Europe U.S. Ratio ≥ 2 73 334 4.6x ≥ 3 58 202 3.5x ≥ 4 28 132 4.7x ≥ 5 8 94 11.8x ≥ 6 4 65 16.3x Time since early growth 10–15 50–60 4–5x of VC industry (years) Source: Dow Jones VentureSource (cross selection, not all funds included) 18

As a result, it is abuyer’s market* in Europe:“European venture capital is a cottage industry characterised by an insufficient number of private investors (e.g. lack of pension and endowment funds which account for roughly 65% of the US VC industry) with the capacity and willingness to invest in venture capital, mainly due to past disappointments and the resulting lack of confidence which still inhibits the European venture industry today.” —Egbert Freiherr von Cramm, Managing Director, Deutsche Bank Private Equity 19 *In the US venture receives substantial funding from university endowments, pension funds and family offices - these three combined are by far the largest contributors and account collectively for more than two third of the US venture capital. In contrast, university endowments within the EU allocate less than 2% of their assets to private equity as a whole, compared to over 10% in the US. Also, while there are over 11,000 family offices in the US, there are only 2,500 family offices in the EU.

Demand side: Proliferation“ The scarcity of VC money in Europe not only has led to low entry valuations, but also has driven up capital efficiency (roughly 70 percent higher than in the US) and yield (hit rate) because the scarcity of money allows the very few investors to simply be more selective.” —Uli Fricke, EVCA Chairwoman 2010-2011 20

There has been a surge in both the qualityand quantity of theentrepreneurial poolin Europe… 93% 92% 50% ut itho t W ea s rep eneur epr e ntr 5.2% 7.4% 7% 50% h Wit at EB 8% 98 e s rep eneur /9 epr 9 e ntr EB 20 0 0 EB 2006 2009 20 07 Latent entrepreneurs in European No. of portfolio companies with repeat population between 18 and 64* entrepreneurs in Venture Capital funds** 21 *Not yet involved in entrepreneurial activities, definitions slightly changed from 2006 to 2009 **Earlybird Venture Capital Fund IV as example (a broader survey of 8 European VCs across 16 funds found an average of 37% serial entrepreneurs in portfolio companies (EVCA, 2011) Source: Earlybird Analysis, Global Entrepreneurship Report 2006/2009

…Resulting in a steadily 1, 87 2growing high-quality early +17stage dealflow % 1,6Earlybird Dealflow Year on Year 00(No. of New Leads)* +6 % 1,4 011 99 2 +17 % 2010 1, 28 +7 5 % 20 09 1, 20 4 2008 2007 *Does not include all leads screened on “fly-by”; gross dealflow factor of min. 1.3 - 1.5x **Expected based on dealflow as of May 31, 2011 22 Source: Earlybird Venture Capital Deal Database

This means that only a fraction of startupsin europe receive funding, so only 10 92the very best firms receive 11 14 46 6venture backing 4 15 98Number of Midstage(>$5M) VC Deals 22 14 1 30 20 19 10 1 13 45 26 20 1 90 13 28 30 4 20 80 11 69 24 20 5 07U. S. 24 20 4 06 23 20 2 05 20 19 40 2 Source: EVCA, 23 Eu ro Venturesource e p 20 03

…while European capital efficiency resultsboth from low entry valuations…Early stage entry valuations for Venture Capital investments € millions €8 M €6M US A €4M .5 ~1o tx 2.5 Eu ro €2M pe 0 2004 2005 2006 2007 2008 2009 Source: Dow Jones VentureSource 24

… and lower cost of growing businesses /tight control of cash invested… Median European investments Median U.S. investments€10 M €10 M€8 M €8 M€6 M €6 M Later€4 M €4 M Second Later€2 M Second €2 M First First Seed Seed 0 0 2004 2005 2006 2007 2008 2009 2004 2005 2006 2007 2008 2009 Source: Dow Jones VentureSource 25

…Which has resulted in Europe matchingthe US for successful exit values at around $ 350M...Average Exit Cap ($ 100M+ Exits) US$M $700 M China $600 M $500 M Europe $400 M $300 M $200 M USA $100 M 0 2004 2005 2006 2007 2008 2009 2010 Source: Dow Jones VentureSource 26

… while investing only halfthe capital to build winnersAverage Capital Invested Prior to $ 100M+ Exit$100 M USA » xits in the same order of E magnitude need only half the amount of VC in Europe $80 M » S capital efficiency not U generally increasing— $60 M hence lower returns, Europe higher prices—and the current shake out $40 M » verage in US 1997–2001 A China was $ 41M per company at $ 317M average exit—just $20 M like Europe now 27 0 Source: Dow Jones VentureSource, 2008 exchange rates 2004 2005 2006 2007 2008 2009 2010

These market changes have led to significanteuropean advantages in entryvaluations, capital M 88efficiency and hit rate $3Benchmarking of VC MPerformance Drivers, $79 M 100 $ 304Europe vs. USA, %2004–2011 ytd M $16.1 M $44 io it at Ex n lu e Va rag e Av .5 M it ior l Ex Pr ita $5 to ed ap st C ve ge In era Av US A Eu n* y io tr ro at En lu e p Va rag e e Av * Average median pre-money valuations of the years 2004-2010 ytd. Source: EVCA, Earlybird analysis 28

Reprehensible…that you are only now reading about the Comeback,but then again: Visibility on European VC Funds forinvestors is highly limited and prejudiced by the poorquality of published industry fund statistics in Europe.* * As a result, recent LP surveys (including most recently from Coller Capital) continue to reflect a dampened VC investment climate in Europe, even though real performance of European VC – by all indicators including current venture-backed liquidity events – is dramatically better than generally perceived. 29

Very small data set in europe – 21% of funds indatabase Representing only15% of the industry 4 7 Da 2,7 do tabaNo. of Funds e s co s note en ver ind tire us tryIn the US, market publication requirements of endowments oblige most GPs to publish financial performance. In contrast, there are no such requirements 42in Europe, so many of the top-performing 1 1,26 %European funds are not publishing their 1financial data in the Thomson Venture 1,17database. Moreover, in Europe 85% of EVCA listed funds have disappeared since the burst of the bubble, and only 10% of the remaining funds are considered active, yet the bulk of European venture fund managers that are still listed are no 21longer active, resulting in a long non- % A US To Dacontributing tail of European VC funds 262 ta ta in l F ba un se dslisted in the Thomson database. Fu rfor ata Pe D nd mSource: EVCA, Earlybird Analysis pe s w an ro ith ce Eu Source: Preqin Performance Analyst database 30

European Venture statistics are 7 notoriously misleading: Performance of post bubble vintages 93 22 36 not yet visible 50 65 78 52 Pos 75 t-bu bbl 84 e vi 64 nta ges In addition to highly 96 misleading published Un re 100 al historical industry data for ize d 50 100 100 % European VC which lead to a 100 negative bias in official 100 statistics, there is almost no 48 Re reported performance of al 35 ize d post-bubble vintages (which effectively started only 19 97 2004/2005) – these funds 19 89 25 are significantly better 19 99 performing and, as evidenced 20 009 by recent exits across top- 20 01 16 tier funds, are now at the 20 02 inflection point 20 03 Assembly of NAV, 20 4 40 European Venture 20 05 Funds by Vintage 20 06 20 07 20 0 31 8 Source: Cambridge Associates: Global VC & PE 20 09 Index and Benchmark Statistics 2009

Just one example: German venture capital The dramatic changes in the European venture scene are well illustrated in Germany, which over the past 24 months has produced the highest number of venture– backed exits in Europe 31

In an economy that is not exactlyunderperforming...Thursday, Feb. 03, 2011 Monday, Mar. 07, 2011Vorsprung durch How Germany BecameExports the China of EuropeWhich G7 economy was the best performer ofthe past decade? And can it keep it up? …”Germany is in a very competitive position today, more than ever,” proclaims Stéphane Garelli, director of the world …Berlin beats Bay Area… Competitiveness Center at the Swiss business school IMD… …Germany grew at its fastest pace for two decades in …German companies poured money into R&D and cut 2010… expenses… …Germany churns out specialized products of such superior …Over the past decade Germany had the fastest growth in quality… GDP per person among the G7 club of rich economies… …That has kept the country in front of emerging economies like China’s and helped it benefit from their rapid growth… …The IMF forecasts that Germany will also have the fastest growth in GDP per head over the next five years… …Germany “is a road map for the U.S. and other countries”… 33

“...increasing numbers of Germans are choosing to forgo corporate life to create nimble, hungry and global high-tech ventures; moreover, they realize that the rapid rise of technology-enabled services over the past decade is a faster route to success than the more capital-heavy Mittelstand.” — Sven Weber, President, Silicon Valley Bank Capital 33 * As a result, the deal flow quantity in Germany is increasingly driven by available entrepreneurs, in contrast to the US, where deal flow is driven by available innovations. Indeed, the density of available entrepreneurs in Germany has almost doubled from 2006 to 2010 according to the global entrepreneurship report, increasing from roughly a third of the US figure in 2006 to two-thirds of the respective US figure today.

This has resulted in over $ 4.4 BNin venture-backed exits in Germanyduring the last 24 monthsVenture-Backed Exits Germany past 24 Months (as of March 2011) Company Acquirer 0 $200 M $400 M $600 M Big Point* Summit & TA Associates $600 M Invatec Medtronic $500 M City Deal* Groupon $500 M RIB Software IPO $500 M Brahms Thermo Fisher $470 M Zouk SiCProcessing $280 M MTM Roche $267 M Netviewer Citrix Systems $240 M Brands for Friends eBay $200 M Redcoon Media Markt $130 M Endoart Allergan $97 M eCircle TA Associates $85 M Inge AG BASF $70 M Nugg.ad Deutsche Post $70 M BridgeCo (SMSC) SMSC $68 M Aloca Motorola $50 M KaufDa Axel Springer $40 M Netzathleten Bertelsmann $25 M 35 * Enterprise Value Ubitexx RIM NA Not including omitted and smaller exits Source: BVK, Earlybird analysis

Yet in an economythat is 25% of US GDP……Germany has only4 independent VC fundsof Investment-Gradesize > € 100M(Vs. in the US >227 funds) 35

A multi-localized venture model“Germany has a unique model where, in a different twist to the hugely successful VC-funded start-up ecosystem of Silicon Valley, the industry is not as much reliant on a handful of blockbusters or even a closely networked startup environment, but rather one where a high number of regionally diversified quality opportunities correspond to increasing levels of entrepreneurial activity.” — Andreas Ritter, ARICO Private Investments Advisory and former Head of Private equity Duke University’s endowment 37

This environment Is producing best-in-classfunds with attractive market fundamentals... Inside-out German VC fund view confirms Median Pre-Money Valuation unparalleled current environment – Initial Round in €M 1 (4 1 (6 3 (1 5 (1 %) 6 (3 ) % 6% 8% ) €9. ) 5% 8M ) ge 14 ( ta 74% -s id 21 ( M 78% ) ) €5. 3M 10 ( 59% ) e ag st ly r Ea €3. 19 98 8M Fu n d 2 (1 20 0% 0 0 ) Fu n 20 2019 d 9 0 07 d 8 0 e Se 20 Fu Fu Fu n n 07 n d d d Fu n d Source: Earlybird Venture Capital example 38

…while many VCs are now investing beyondthe J-curve and generating early liquidity €3 6.due to strong accelerated traction 6Revenue Traction per Fund Generation (Year 1-5)* in €MThese trends suggest that German VC has plenty of headroom, with accelerating exit activity further improving performance in post-bubble vintages (2005/2006 et seq.) und und und 8F 0F 07 F €1 199 200 3. 20 4 €1 4. 5 €6 €1 0. .6 5 €7 .6 €7 .1 €3 €2 .2 .8 FC €3 €3 5 5 5 .7 .4 Yr Yr Yr 4 4 4 Yr Yr Yr €0 .2 3 3 3 €0 Yr Yr Yr €0 .9 .8 0 2 2 2 Yr Yr Yr 1 1 1 Yr Yr Yr *Aggregate shareholding weighted revenue contribution of portfolio companies Source: Earlybird Venture Capital Example 39

Summary:The Sky is the Limit» he structure and performance of European T venture capital illustrates the unparalleled potential of a matured industry.» number of funds based in Europe A have achieved US top quartile performance in post-bubble era.» he imbalance between VC funding (supply) T and investment opportunities (demand) is driving a unparalleled competitive landscape.» uropean VC has finally emerged with strong E fundamentals within the context of an inefficient market while benefitting from a higher capital efficiency than the US. 39

Presented By: Hendrik Brandis Jason Whitmire Managing Partner General PartnerEarlybird Venture Capital Earlybird Venture Capital With Assistance From: Amit Kumar Jain, Summer Associate, INSEAD Designed by Arno Ghelfi, l’atelier starno. Photos for illustrative purposes only. 41

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Earlybird Europe Venture Capital Report

by Jason Whitmire on Jul 22, 2011

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