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IDCEE 2012: CEE on the global VC map - Drew Guff (Managing Director & Founding Principal @ Siguler Guff & Company)
 

IDCEE 2012: CEE on the global VC map - Drew Guff (Managing Director & Founding Principal @ Siguler Guff & Company)

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Drew J. Guff is a Managing Director and founding principal of Siguler Guff, a global multi-strategy private equity firm managing domestic and international assets on behalf of corporate and public employee benefit plans, endowments, foundations, government agencies, financial institutions, sovereign wealth funds, family offices and high net worth individuals. The Firm's funds target carefully defined areas of market inefficiency, including distressed assets, U.S. small buyouts and the Emerging Markets.

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  • Explosive growth of VC funds over the past 20 yearsToo much capital targeting VC opportunitiesAverage fund size is now well over $100 million, several are larger than $1 billionIn the U.S., trend since 2005 has been toward fewer firms raising more capital, as those that can’t access “the magic 15” deals are squeezed out.
  • Marc Andreessen (paraphrased): The data say that in any given year there are only about 15 funded companies that will ultimately reach $100mm in annual revenues. These companies end up accounting for something like 97% of venture capital returns. Unstated message: If a VC fund can't get into these 15 deals, it has very little chance of delivering strong returns for the above-average risks it takes.
  • Top Silicon Valley investors have 2 or more overseas offices:Bessemer Venture Partners has 3 overseasoffices in Brazil, Israel and India (also a presence in Russia)Accel Partnershas 3 overseasoffices in UK, China, IndiaKleiner Perkins Caulfield Byers: 2 overseas offices (Shanghai and Beijing)
  • Led by China, Emerging Asia continues to be the foremost destination for capital in emerging markets, capturing 68% of capital raised and 70% of capital invested in 2011. Fundraising and investing has steadily increase for China-focused funds.
  • China is sustaining remarkable domestic growth despite lessened exports; economy is rapidly diversifying. Domestic demand remains strong even as government stimulus is withdrawn.China’s domestic consumption already accounts for approximately half of BRIC consumption.By 2020, China will have more middle class citizens than all of the G7 combined.
  • High levels of competition on the Indian PE/VC market has hurt returns, leading to a steady decline in fundraising since 2009.
  • Peak of VC investing in CEE was €201 million in 2008. 2011 is the highest year since then at €94 million, up 57% from €60 million in 2010.VC investments in start-ups in 2011 amounted to €53 million, up from €28 million in 2010 and just €11 million in 2009. Peak in start-up investing was €61 million in 2007.Funds included in this chart:2012: VTB-I2BF Russia Kazakhstan Nanotechnology Fund Mandarin Capital Partners II 2008: Cowen Capital Partners
  • Making the region second only to China and the U.S. in terms of users
  • Page views from mobile devices grew by 50% in 6 months – 4% of pageviews were from mobile devices as of Dec. 2011, now that number is approximately 6%The CEE region’s share in mobile page views grew 252% in 2010-2011Approximately 6% of all page views in CEE come from mobile devicesEvery 25th page view globally comes from a CEE resident on a mobile deviceSocial network penetration in CEE is high – 79% vs. 66% in Western EuropeLocal players still lead Facebook in audience share on several CEE markets:Latvia: Draugiem (54.2%)Poland: NaszaKlasa (58.5%)Russia: VK (69.6%), Odnoklassniki (61%)Global players have been largely unsuccessful at penetrating the CEE marketHomegrown tech expertise is giving rise to local equivalents of global brandsLocal players are better able to meet the needs of local consumers
  • Company key:Search: Seznam.cz (Czech), Neti (Estonia)Auction: Allegro (founded in Poland but now in many CEE countries, Naspers acquired its parent Tradus in 2007); Aukro (Czech Republic brand of Allegro)E-commerce: Empik (Poland)Group deals: Cherry Media (Baltics) Slevomat (Czech Republic) -> Slevomat bought a minority stake in Cherry Media in Dec. 2011, and the two launched a strategic partnership collaborating on new products, cross-border deal sourcing, and IT platforms. Their combined 2011 revenue was €60 million.Social networking: NK = NaszaKlasa (Poland); Draugiem (Latvia)
  • CEE universities (University of Warsaw and St. Pete State University of Information Technologies) have won in 7 out of the last 10 ACM International Collegiate Programming CompetitionsTable: Elephant logo is Evernote, founded by a Russian and has significant dev presence in Moscow
  • Russian IT offshore market it $1.5 billionViewdle is a portfolio company of WTI
  • EPAM opened its first Ukrainian office in 2006. Headcount in Ukraine is now second only to Belarus, accounting for some 25% of EPAM’s total global workforce.
  • Most mature smartphone market is the U.S. – penetration over 50%
  • Significant upside exists for e-commerce in CEE markets, especially those that still have low smartphone penetration rates
  • … and this is what VC’s will invest in

IDCEE 2012: CEE on the global VC map - Drew Guff (Managing Director & Founding Principal @ Siguler Guff & Company) IDCEE 2012: CEE on the global VC map - Drew Guff (Managing Director & Founding Principal @ Siguler Guff & Company) Presentation Transcript

  • Emerging Markets on the Global VC MapIDCEE 2012 ConfidentialA Presentation to Lorem Ipsum Plc May 2007 18, 2012 October
  • Siguler Guff Investments in Technology+ Siguler Guff BRIC Opportunities Funds: Siguler Guff manages one of the largest pools of fund-of-funds assets investing in the large and dynamic emerging economies of Brazil, Russia, India and China China India Brazil Russia1+ Siguler Guff co-managed a series of Venture Lending & Leasing (VLL) funds in Silicon Valley alongside Western Technology Investments + Transactions in the VLL funds include: Siguler Guff & Company Western Technology manages the day-to-day operations of the VLL funds October 2012 02 1Russia funds are managed by Russia Partners, an affiliate of Siguler Guff & Company
  • Development of Global Venture Capital Industry+ There has been a huge paradigm shift in VC over the last 12 years+ 1990s + Average net multiples to LPs were approximately 3-4x invested capital + Average life of a portfolio companies was 3.4 years + Average fund sizes below $100 million + Portfolio companies went public earlier and while they were “smaller” + The IPO market was very robust+ 2000s + Returns have been low, and even negative for the last 10-15 years + Average fund multiples are only 1.2x + Since 2000, only 6% of VC funds have had IRRs in excess of 20%, as competition for deals have driven up entry multiples + Average life of portfolio companies is eight years + With the average term of a VC fund at 10 years, there is a huge timing mismatch + VC fund terms must now be at least 15 years to match holding period of investments Siguler Guff & Company October 2012 03Source: Preqin
  • Global VC Returns Have Steadily Deteriorated Since the Late 1990s 5.0x 60% 4.5x 50% 4.0x 3.5x 40% 3.0x 30% 2.5x 20% 2.0x 1.5x 10% 1.0x 0% 0.5x 0.0x -10% TVPI Arithmetic Mean Net IRR Arithmetic Mean Siguler Guff & Company October 2012 04Source: Cambridge Associates
  • Fewer Funds Raising More Capital in the U.S. Since 2005 $180 1,200 $160 1,000 $140 $120 800 $100 600 $80 $60 400 $40 200 $20 $0 0 Avg fund size ($ M) Firms actively investing (U.S.) Siguler Guff & Company October 2012 05Source: NVCA
  • Wealth Creation in Tech Companies is Extremely Concentrated “~2% of companies accounted for ~100% of net wealth creation of 1,720 Tech IPOs in USA (1980-2002)” - The Technology IPO Yearbook: 9th Edition – 23 Years of Tech Investing, Morgan Stanley “97% percent of the VC returns in any given year come from 15 investments, among the thousands that receive funding” - Andreessen Horowitz Siguler Guff & Company October 2012 06
  • Because Only A Few Can Access the “Magic 15” Deals 45% U.S. Venture Capital 15-Year Returns* 40% 38.2% 35% 30% 25% 20% 16.1% 15% 9.6% 10% 5% 0% All VC Firms All VC, Minus 5 Firms All VC, Minus 10 FirmsSource: Cambridge Associates LLC Non-Marketable Alternative Assets Database*Returns as of March 31, 2010. Returns are end-to-end pooled means to LPs, net of management fees, expenses, and carried interest Siguler Guff & CompanyThe end-to-end performance calculation is similar to the IRR, however it is measuring the return between two points in time. The calculation takes into account the October 2012 07beginning NAV as the initial investment. The subsequent quarterly cash flows and the ending NAV for the specified time period (i.e. one quarter, one year, etc.) are utilizedin the same fashion as the IRR calculation. All returns greater than one year are annualized.
  • VC is Going Global in Search of Returns Plan to decrease international investment No plans to invest outside the U.S. Plan to maintain current level of intl investment Plan to increase international investment Already invest outside the U.S. 0% 10% 20% 30% 40% 50% 60% Siguler Guff & Company October 2012 08Source: NVCA Survey, 2011
  • Internet Penetration: Emerging Markets Drive Growth+ 44% of all global Internet users are located in the U.S., Russia, Brazil, India and China Russia 61 million users +17% Y/Y 43% Penetration U.S. China 245 million users 513 million users +0.6% Y/Y +19% Y/Y 78% Penetration 36% Penetration India 121 million users +18% Y/Y 8% Penetration Brazil 76 million users +19% Y/Y 37% Penetration Siguler Guff & Company October 2012 09Source: Internet user stats (2011 figures) from International Telecommunications Union and Morgan Stanley research
  • EMs Account for 9 of the 10 Fastest-Growing Internet Markets 2008-2011 Internet User 2011 Internet PopulationRank Country Adds Users YoY growth Penetration 1 China 215 513 19% 36% 2 India 69 121 18% 8% 3 Indonesia 37 55 22% 23% 4 Philippines 28 34 44% 35% 5 Nigeria 21 45 - 28% 6 Mexico 19 42 19% 37% 7 Russia 16 61 17% 43% 8 USA 15 245 1% 78% 9 Iran 14 37 - 48% 10 Turkey 11 36 26% 49% Top 10 445 1,189.0 12% 32% World 663 2250 8% 32% Siguler Guff & Company October 2012 010Source: ComScore
  • China – Primary Destination for International PE&VC 120% EM PE Fundraising by Region (% of total capital raised) 100% 10.0% 22.0% 80% 7.0% 24.0% 7.0% 7.0% 5.0% 25.0% 8.0% 5.0% 60% 24.0% 18.0% 15.0% 26.0% 7.0% 40% 18.0% 14.0% 34.0% 12.0% 20% 43.0% 29.0% 32.0% 8.0% 22.0% 7.0% 0% 2007 2008 2009 2010 2011 China India Emerging Asia ex-China and India* CEE & CIS LatAm & Caribbean MENA Sub-Saharan Africa Multi-region Siguler Guff & Company October 2012 011Source: EMPEA; Funds raised do not include global funds with allocations to China
  • China – Scale and Strong Domestic Consumption Story BRICs Population Entering the Middle Class Income Bracket 1,800 by 2020 (Millions) 1,600 1,400 1,200 1,000 800 600 400 200 0 Brazil Russia India China BRICs G7 2000 2010 2020 50% BRICs Consumption as Proportion of U.S. Consumption 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Siguler Guff & Company Russia India China Brazil October 2012 012Sources: Goldman Sachs, Datastream, Siguler Guff Analysis
  • India – Soft Fundraising Environment $12,000 Funds Raised and Invested ($M) $10,000 $8,000 $6,000 $4,000 $2,000 $0 2004 2005 2006 2007 2008 2009 2010 2011 Funds Raised Funds Invested Siguler Guff & Company October 2012 013Source: EMPEA
  • CEE is Becoming a Destination for VC Investment+ Central and Eastern Europe has become a destination for VC investing in the past ten years, after being largely ignored in the 1990s+ 97 CEE companies received venture funding totaling €94 million in 2011, driven by start-up investments (+85% YoY in value, +76% by number of companies)+ Ukraine, Poland, Hungary, the Czech Republic and Romania together accounted for 92% of total investment value and 70% of total number of companies financed in CEE in 2011 CEE-focused VC Fundraising $1,800 11 Value raised ($ M) # Number of New Funds $1,600 $1,400 $1,200 $1,000 6 $800 4 $600 8 2 6 4 $400 2 3 1 10 9 7 $200 4 4 8 4 5 0 $0 Siguler Guff & Company October 2012 014Source: EVCA, Preqin, Siguler Guff estimates
  • Venture Funds Have Been the Most Successful Fundraisers in CEE 2010 2011 Amount No. of Funds Amount No. of Funds Early stage € 82,020 4 € 59,730 4 Later stage venture € 8,420 1 € 10,120 1 Balanced € 46,030 2 € 124,840 3 Total venture € 136,470 7 € 194,690 8 Growth € 20,000 1 € 51,300 1 Buyout € - 0 € - 0 Mezzanine € - 0 € - 0 Generalist € - 0 € - 0 Independent Funds Raised € 156,470 8 € 245,990 9 Siguler Guff & Company October 2012 015Source: EVCA
  • CEE’s Internet Audience Grew to Over 200 Million in 2011+ The CEE region is larger than both Brazil and India in terms of Internet audience+ Russia is the largest Internet audience in Europe 70 60 50 40 30 20 10 0 Siguler Guff & Company October 2012 016Source: Internet World Stats
  • Mobile Page Views in CEE Grew Robustly in 20111200% Growth in Mobile Page Views, 2010-20111000% 800% 600% 400% 200% 0% Siguler Guff & Company October 2012 017Source: Gemius
  • But Significant Upside Still Remains Romania 8.4% Ukraine 8.9% CEE Slovakia 9.3% Smartphone Penetration: Latvia 10.7% 14.8% Russia 11.8% vs. 40-50% in Estonia 12.7% U.S., Western Europe Hungary 12.9% Serbia 13.3% Czech Rep. 14.3% Croatia 15.5% Lithuania 23.7% Turkey 23.7% Slovenia 27.6% 0% 5% 10% 15% 20% 25% 30% Siguler Guff & Company October 2012 018Source: Gfk Group
  • CEE Mobile Data and Social Network Penetration Siguler Guff & Company October 2012 019Sources: Gemius, Vincos.it
  • CEE – Homegrown Talent Breeds Local Leaders+ Locally developed companies have managed to maintain strong market share vs. global leaders, unlike in most Western markets Global Leaders CEE Equivalents Siguler Guff & Company October 2012 020
  • ACM International Collegiate Programming World Finals+ 14 of the top 20 teams in the 2012 ACM International Collegiate Programming World Finals were from CEE universities Place University 1 St. Petersburg State University of IT, Mechanics and Optics 2 University of Warsaw 3 Moscow Institute of Physics & Technology 5 Belarusian State University 10 Moscow State University 12 Belarus State University of Informatics and Radioelectronics 13 Saratov State University 18 Jagiellonian University in Krakow 18 National Technical University "Kharkiv Polytechnic Institute" 18 Nizhny Novgorod State University 18 St. Petersburg State University 18 University of Latvia 18 University of Wroclaw 18 Ural Federal University Siguler Guff & Company October 2012 021
  • CEE – Tech Expertise Drives VC Market+ Cluster of excellence – sophisticated base of programmers and IT knowledge+ ~950k science and tech graduates per year – more per-capita than India/EU/North America; heritage of technology and engineering excellence backed by the educational system focus+ Lower attrition boosts knowledge retention and value+ Low tax rates encourage entrepreneurship, although further government support necessary+ Successful history of entrepreneurialism, with significant investments and public listings Sector IT Software Software Search Web portal CEE Base Estonia Czech Republic Russia Russia Russia Exit Type Acquisition IPO Series D IPO IPO Valuation* $8.5 billion $530 million $1 billion $7.6 billion $6.6 billion Siguler Guff & CompanySources: Forbes, Bloomberg October 2012 022* Valuation for IPOs based on market capitalization as of October 12, 2012
  • Country Snapshot – Ukraine+ IT outsourcing sector reached $1 billion in 2011, exceeding arms exports for the first time+ Ukraine has the largest pool of engineering talent in CEE, accounting for 25% of the CEE IT offshoring market + 16,000 graduates with IT specializations each year + 4,000 IT companies specializing in offshore development + Ranked 26th most-attractive outsourcing destination in the world by Sourcingline+ Ukrainian development teams are building significant value for venture-backed companies: + Founded in Ukraine in 2006 + Leader in facial recognition and computer-vision technology + Acquired by Motorola Mobility (Google) this month for approximately $40 million + Founded in Israel in 2006, development team in Ukraine + Flash web site development platform + Has raised over $60 million from leading VCs, reportedly rejected $200 million acquisition offer in 2011 + Founded in the U.S. in 1993, team in Ukraine since 2006 + Leader in software engineering outsourcing + Held IPO on NYSE in February 2012, market cap is currently over $800 million Siguler Guff & Company October 2012 023Source: Financial Times, EVCA, Sourcingline, VC Cafe
  • EPAM – CEE’s IT Powerhouse+ Leading software engineering outsourcing company in CEE and the CIS, with development centers and offices across CEE+ Operated by an experienced and Western- oriented management group+ Recognized as one of the fastest growing specialty application development leaders+ In February 2012, EPAM successfully listed on the NYSE under the ticker symbol “EPAM”+ Blue-chip diversified client base Siguler Guff & Company October 2012 024
  • Over 92% of EPAM’s Workforce is in CEE+ Ukraine is home to EPAM’s largest workforce outside of Belarus and its fastest growing operations Siguler Guff & Company October 2012 025
  • Shift to Mobile Data: Just Beginning Globally 7,000 Smartphone vs. Basic Mobile Subs 6,100 6,000 5,000 4,000 Global Smartphone Penetration: 3,000 15.6% 2,000 953 1,000 0 Smartphone "Dumb" Mobile Phone Siguler Guff & Company October 2012 026Source: Informa, Morgan Stanly
  • Mobile Data Usage Will Drive E-Commerce… 20.0% 15.0% 10.0% 5.0% 0.0% 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 U.S. eCommerce YoY Growth U.S. Mobile Commerce as % of eCommerce Siguler Guff & Company October 2012 027Source: Kleiner Perkins Caulfield Byers, ComScore
  • …As Well as Advertising Spend % of Time Spent in Media vs. % of Ad Spend, U.S. 2011 50% 45% 40% 43% 42% 35% 30% ~$20B+ 25% Opportunity 25% 26% in the U.S. 20% 22% 15% 15% 10% 11% 10% 5% 7% 1% 0% Print Radio TV Internet Mobile Time Spent Ad SpendSource: Kleiner Perkins Caulfield Byers Siguler Guff & CompanyNote: *Internet (excl. mobile) advertising reached $30B in USA in 2011 per IAB, Mobile advertising reached $1.6B per IAB. Print includes newspaper and magazine. October 2012 028 $20B opportunity calculated assuming Internet and Mobile ad spend share equal their respective time spent share.
  • 29% of Adults in the U.S. Own Tablets, Up From 2% in Mid-2009 % of U.S. Adults That Own Tablet Computers or e-Readers 4/2009-1/2012 35% 30% 29% 25% 20% 15% 10% 5% 2% 0% Siguler Guff & CompanySource: Kleiner Perkins Caulfield Byers October 2012 029
  • Big Data World: Data Needs to Increase 50x by 2020 120,000,000 Global Data Needs (terabytes) 100,000,000 100,000,000 80,000,000 60,000,000 40,000,000 20,000,000 2,000,000 0 2012 2020 Siguler Guff & Company October 2012 030 Source: Oracle
  • Takeaway – Technology is Changing Every Aspect of Our LivesWhat Then NowComputers Desktops/Notebooks Tablets/SmartphonesVoice Fixed Line MobileNews Newspapers, Dedicated Reporters TwitterNote taking Pen and paper EvernoteBooks Paperback/Hardcover Amazon Kindle / Apple iBooksMusic CDs, records SpotifyDiscounts Clipping coupons GrouponYellow pages/directories Phone book YelpVideo rental Physical stores/Blockbuster Netflix, AmazonNavigation Paper maps, traffic reports Google Maps, WazeTelevision Linear programming, set channels YouTube, On DemandSound Tape recorders SoundCloud Siguler Guff & Company October 2012 031
  • Upcoming Changes Will Be of an Unprecedented Magnitude+ Nearly Ubiquitous High-Speed Wireless Access in Developed Countries+ Unprecedented Global Technology Innovation+ Fearless (and Connected) Entrepreneurs+ Available (and Experienced) Capital+ Fearless (and Connected) Consumers+ Inexpensive Devices / Access / Services (Apps)+ Ability to Reach Millions of New Users in Record (and Accelerating) Time Grabbing these trends will determine tomorrow’s TECHNOLOGY BILLIONAIRES Siguler Guff & Company October 2012 032
  • DisclosuresThis Presentation is for informational purposes and is not meant as investment advice or a recommendation as to any course of investment action. Further, it not an offer,solicitation or recommendation to purchase or sell any securities or partnership interests of any investment fund managed by or affiliated with Siguler Guff Advisers, LLC(“Siguler Guff”) (each, a “Fund” and, collectively, the “Funds”). This presentation does not present a full or balanced description of any Fund or investment plan, and should notbe used as the exclusive basis for an investment decision.This information may include general market activity, industry or sector trends, or other broad-based economic, or market conditions. This information should not be construedas research or investment advice. This information may not be current, and Siguler Guff has no obligation to provide any updates or changes to such information.Economic and market forecasts presented herein reflect our judgment as of the date of this material and are subject to change without notice. These forecasts do not takeinto account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific investor or client. Potential investors and clients shouldconsider whether any advice or recommendation in this material is suitable for their particular circumstances. References to indices, benchmarks or other measure of relativeperformance over a specified period of time are provided for your information only.Potential investors are urged to consult a professional adviser regarding any economic, tax, legal or other consequences of entering into any transactions or investmentsdescribed herein. Alternative investment strategies, such as private equity, inherently involve risk and may not be suitable for all investors.Any reproduction or distribution of this Presentation, or any information contained herein, is prohibited. This Presentation contains highly confidential and proprietaryinformation that is of independent economic value, with respect to information concerning portfolio funds and companies. By accepting this Presentation, the recipientacknowledges that disclosure of any information contained herein could cause substantial, irreparable harm to Siguler Guff, and the funds and portfolio companies, andagrees not to disclose such contents to any person or entity (except as required by law), and not to use such contents in any way detrimental to the Funds, Siguler Guff, or theportfolio funds or companies.This Presentation may contain performance information. Past performance does not guarantee future results, and no representation or warranty, express or implied, ismade regarding future performance. The general partners of the underlying funds have not reviewed or approved of this Presentation. This Presentation contains certainstatements, estimates and projections that are “forward-looking statements.” All statements other than statements of historical fact in this Presentation are forward-lookingstatements and include statements and assumptions relating to the following: plans and objectives of management for future operations or economic performance;conclusions and projections about current and future economic and political trends and conditions; and projected financial results and results of operations. These statementscan generally be identified by the use of forward-looking terminology, including “may,” “believe,” “will,” “expect,” “anticipate,” “estimate,” “continue”, “rankings” or other similarwords. Siguler Guff does not make any representations or warranties (express or implied) about the accuracy of such forward-looking statements. Readers of this Presentationare cautioned not to place undue reliance on forward-looking statements.This Presentation may include footnotes or endnotes which, if included, are an integral part of this Presentation and should be read in their entirety. Any sale of securities inCanada will be effected through an affiliated broker dealer. Siguler Guff & Company October 2012 033