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  • 1. TM*nextwave Ideas for private equity investors and entrepreneurs in the technology industry Inside Web 2.0: The Internet subset formerly known as the Web Successfully shaping the future: MoneyTree™ FutureCentricSM companies 2005 ISSUE 4: 2005 Q4 and Full-year *connectedthinking
  • 2. TM*nextwave Special topics 01 Web 2.0: The Internet subset formerly known as the Web ISSUE 4: 2005 07 MoneyTreeTM Report Full-year and Q4 results 23 Successfully shaping the future: MoneyTreeTM FutureCentricSM companies 2005 Quarterly features 20 Regulatory buzz: Issues regarding cheap stock and IPOs for private companies 24 Industry currents: Fast-growth CEOs take brighter outlook, but proceed with caution 26 Voice of the VC
  • 3. Message to the readerA new year, a new beginning. So once again nextwave™ is looking to thefuture—at the evolution of technology and the companies and entrepreneursdriving that change.Our lead article, “Web 2.0: The Internet subset formerly known as the Web,”explores the next wave of Web-related development driven by the rapidconsumer adoption of broadband and high-speed wireless connectivity. Oursecond article, “Successfully shaping the future: MoneyTree™ FutureCentricSMcompanies 2005,” showcases a few of the entrepreneurial companies whoare building ideas and products that are shaping our future.Also included in this issue are the fourth-quarter and full-year results of thePricewaterhouseCoopers/National Venture Capital Association MoneyTreeTMReport; data provided by Thomson Financial. Venture capitalists matched2004 by investing $21.7 billion in 2,939 deals in 2005. See pages 7 through 18for full details.Finally, look for our regular features throughout the issue—Industry currents,Regulatory buzz, and Voice of the VC—providing brief updates, useful advice,and expert opinions on both the VC and technology industries.You have a vision. PricewaterhouseCoopers helps bring that vision to reality. Wehope you enjoy the Q4 2005 issue of nextwave™ and appreciate your commentsabout our current issue or ideas for what you’d like to see covered in futureissues. Remember to visit us on the Web at www.pwcnextwave.com.Tracy T. LefteroffGlobal Managing PartnerPrivate Equity and Venture Capitaltracy.t.lefteroff@us.pwc.com
  • 4. Web 2.0:The Internet subset formerlyknown as the WebThere are many reasons to change “We are clearly in a new wave of media types—including text, audio,a name—from technology updates Web-related development that is and video—as well as broad Weband business model breakthroughs being driven by the rapid consumer adoption by both consumers andto participation in the Federal adoption of broadband and high- enterprises.”Witness Protection Program. In speed wireless connectivity,” observesthe case of the Web, the tweak Brad Feld, a managing director at “For us as auditors, Web 2.0 couldto Web 2.0—first suggested Mobius Venture Capital. “Google present lots of exciting opportunitiesby O’Reilly Media Inc. VP Dale did a brilliant job of teaching a huge and, hopefully, I think some of theseDougherty—is meant to suggest number of people that an acceptable companies may have a better chance user interface to the Web was simply of going public than companies inthat enough factors have changed a box on the screen that you typed other technology sectors,” notessince the late ‘90s to warrant text into and hit the search button; Danny Wallace, partner in charge ofanother look at what the Web this resulted in a resurgence of online PricewaterhouseCoopers’ Assurancemeans to commerce, applications/ advertising and ecommerce that is Venture-backed Start-up Practice inservices, and online communities. helping the premises of many pre- San Jose. “However, on the whole,Has the process of how we gain bubble entrepreneurs and investors the VCs we speak with—regardless ofaccess to the Web, interact with finally become realized. As optimism sector—expect far fewer companies toit, and deliver services evolved returns to technology entrepreneurs go public. Let’s say their expectationenough to support more profitable, and investors, we’ve seen an incredible four or five years ago was that threesustainable businesses? new wave of innovation across all or four out of ten companies in their www.pwcnextwave.com 1
  • 5. portfolios might be going public, December 2004 co-founded Odeo— tasking 19-year-old cousin interactnow it might be one. And, they factor a creative way to record and share with the Web. “You can assemblethat into their investment strategies.” audio at no cost to the user—with subcomponents to make applications his neighbor, Noah Glass. This time, much more quickly than you used toSuch IPO estimates don’t seem to the team chose to take VC and other be able to do and that’s why you seedampen the spirit of developers, funding, which they describe with things like Google releasing a map APIsome of whom look to be acquired by a flair in the OdeoBlog as follows: and soon you have people mappingInternet companies such as Google “Leading the deal was Charles River friends, mapping packages, mappingand Yahoo!. Benchmark Capital Ventures, featuring George Zachary. In restaurants, mapping stores… It’sGeneral Partner Bill Gurley says addition to Charles River’s involvement, relatively quick to snap togetherthat this seems to be the case with we included another small firm, Amicus different data sources to createinteresting technology/features and Ventures, and a substantial group of composite applications on the Web.”tool-based companies with exits under individuals (both in number and weight)$150 million. “If you’re not sure that in the funding round: Mitch Kapor, Joe Scott Rafer, who grew up in a techwhat you’re building has the essence Kraus, Tim O’Reilly, Ron Conway, Josh products household near Boston,of a full, standalone business, there is a Kopelman, Don Hutchinson, Dave Pell, is aiming at the under-25 crowd ofhuge incentive to bootstrap or take very Mike Maples, Francesco Caio, Barbara cell phone users as the new CEOlittle money,” says Gurley. “Then, you Poggiali, Emanuele Angelidis, James of Wireless Ink. “There are all sortsown 60-70 percent of something, sell it Hong, and Ed Zschau.” of things we take for granted on thefor $20 million, and that’s real cash.” Web in terms of just being able to find Web 2.0 as environment people with the same interests wePrincipal for New Business have,” says Rafer. “And, because ofDevelopment at Google, Chris Sacca, Hallmarks of the participatory, the way mobile phone carriers haveencourages entrepreneurs to think connected Web 2.0 environment behaved there is no central index forbig: “Don’t assume we have thought include: the rapid rise of blogging— people in my area, or ways to findabout ‘X’ already. One of the most posting to or writing in Web logs— fans of the same bands and similarentertaining things for me to do is read since 2004 when people discovered information. We’re simply going tothe blogs and see how much credit that blog software wrote the HTML string a bunch of existing mobile chatfolks give us for our alleged next moves software for them; categorizing sites, à system users together with a rationalin a particular area,” wrote Sacca in la del.icio.us and Flickr, collaboratively interface so that anywhere on thehis blog. “They presume we have a using keywords referred to as “tags”; planet you can find people in yourbig honking master plan document the mainstreaming of RSS (Really city currently on their phones chattingsomewhere and have the next few Simple Syndication), which started as in this moment about a topic, or in ayears set forth step-by-step. Truth is, a way to aggregate news feeds, spread particular forum, or at this concert.”we are constantly learning. We tend to to use in job postings, commerce, andlaunch early and launch often. However, enterprise applications and will be part David Sifry, founder and CEO ofthis doesn’t mean we have it all figured of Microsoft’s upcoming new releases; Technorati, a search engine unique forout. You have a killer idea for us? Are and more engaging client functionality its focus on people and time—insteadwe missing the big picture? Can you through the browser using AJAX, of pages—considers one of the keyhelp us? Fire away. For instance, you which uses existing technology like changes of Web 2.0 over Web 1.0 toguys who have been thinking about JavaScript and XML. be evidenced by the change in theVoIP for years and years, what would metaphor for how we think about theyou do if you were Google, and how “Web 2.0 is really a user application- Web, from a library, where a referencecan you work with us to get that done?” driven revolution,” notes 27-year-old librarian can help you find the sources MBA Charles Hudson, a product you need, to an ongoing conversation.Some “serial entrepreneurs” take both manager at Iron Port Systems, San “Google understood an additionalroutes. For example, Evan Williams Bruno, California, who marvels at the dimension of the data,” explains Sifrey.sold Blogger to Google in 2003 and in difference in the way he and his multi- “They understood it was not just about2 Issue 4: 2005
  • 6. “You cannot go into the same water twice.” Platounderstanding key words to figure out or another event, instantly. “Insteadrelevance, but [they could produce of a 24-hour news cycle, the world isbetter search results by] counting measured in megahertz,” says Sifry.hyperlinks to those pages. Google isso good because it doesn’t rely on Technorati is so good because you canalgorithms alone to feature what’s search for a topic or name and find outrelevant; it uses people to understand what’s been said about it in as little ascontext and gray areas as well.” a few seconds ago, by whom, and how many other people link to this site—Sifry’s story seems to be another which can offer a sense of authoritycharacteristic of Web 2.0: creating a for the source. The company’s modelproduct because it satisfies a personal is to generate revenue in three ways:need for interacting with the Web. Sifry, 1. advertising, 2. fees for sponsoredan avid blogger who had headed up links, and 3. syndication relationships,three previous start-ups, wanted to such as those with The Washingtonknow who was talking about him and Post, Newsweek, International Heraldbuilt Technorati over Thanksgiving in Tribune, and other big media.2002. He didn’t intend it as a business,but he explains: “It turns out there are Dean Petracca, Global Managinga whole lot of other people out there Partner of Software andwho basically felt the same way. It Internet Industry Services atjust turned out to be wildly popular.” PricewaterhouseCoopers, views theConsider the impact when on-air difference between Web 1.0 and Webnews organizations can view the buzz 2.0 as a before-and-after period inabout the story they’re broadcasting, terms of technology, its adoption, and www.pwcnextwave.com 3
  • 7. “Web 2.0 is really a user application-driven revolution.” Charles Hudson, Iron Port Systems how the two affect business practices, product, which provides mass feed particularly when it comes to greater importing, management, and analysis cooperation among companies. to help publishers with multiple feeds better understand and engage “I see increased recognition that its audience. USA Today.com uses not only does Web 2.0 encompass FeedFoundry to manage and measure technology, content, and connectivity, RSS subscription growth for over 100 but also that companies specialize in of its magazine and columnist feeds. delivering value in each of those areas, and in many cases, acknowledgement In any environment, healthy that no one company necessarily has collaborative relationships hinge on a all the talent it needs,” says Petracca. mutually beneficial business model. “For example, valuable content that For example, Revver is a monetization could be delivered over the Web engine for video shorts being backed more often might be provided by one by Skype’s main investors—Draper, company and managed or maintained Bessemer, and DFJ. “Revver’s mission by another.” in life is to help the publishers or owners or creators of video shorts For example, Chicago-based privately make money through advertising,” says held Feedburner enables commercial Andreas Stavropoulous, managing publishers, podcasters (downloadable director, Draper Fisher Jurvetson. “So, audio file makers inspired by the they publish their video on Revver, set iPod), and bloggers to reach millions a tag with it, and no matter where it of subscribers in more than 190 appears as long as someone clicks countries using Rich Site Summary on an ad delivered somewhere when (RSS) technology. it plays you get a big piece [of the revenue]. Figuring out the business “When we started FeedBurner in 2003, model—which is making money based we saw the Web evolving from a tool either on advertising, subscriptions, for simple browsing to more intention- or transactions—in the Web 2.0 based searching to now allowing distributed or syndicated world is consumers to subscribe to any content no small task,” he adds. “It’s much and read, listen to, or watch it wherever harder to do when you’re talking about they want, when they are ready to do a world of syndication, where your so,” says Chicago-based FeedBurner content at point A gets consumed CEO, Dick Costolo. “It was clear to us at point B, which may or may not that every network-aware device would be connected, may be intermittently soon provide a mechanism to consume connected, and measured differently.” all manner of content and that the standard of distribution would be RSS. “There are many companies that We had a simple plan to be the people are taking a longer term view who help publishers navigate the and trying to build a sustainable complexities of measuring subscriber standalone business,” observes reach, maximizing subscription growth, PricewaterhouseCoopers’ Wallace. and making money from content in “It’s hard to do that on your own syndication, and that has remained and often it results in partnering up our goal.” On January 24, Feedburner with another company, particularly a announced its new FeedFoundry local company if you are considering4 Issue 4: 2005
  • 8. venturing into emerging international hard technology. That has changed. By September 2005, Salesforce.commarkets. This is true for large and small Now, every VC firm on Sand Hill had invested $50 million to rebuild itscompanies alike. Consider Yahoo! for Road is rushing to hire someone to architecture, hardware, and two dataexample and their recent deal with run their Internet consumer practice. centers—and created an on-demandAlibaba in China, reportedly valued Because if you look over the past five operating system and platformat $4 billion. At the other end of the years, whether it’s Google or Skype called AppExchange from whichspectrum you have a company like or Shopping.com, all these deals are Salesforce.com subscribers couldMforma, a venture-backed company Internet deals. They had much bigger choose to test-drive and use businessthat provides mobile entertainment exits than other deals. I think the top applications from independentcontent to leading wireless five exits of the past seven years are vendors, including Adobe PDF,operators globally. They invested all consumer Internet: Google, eBay, Business Objects’ Crystal Reports,in and partnered with two content Yahoo!, Expedia, Amazon. Now they’re and Skype for free Voice Overdevelopment companies in China all back. What does that mean? From a Internet Provider (VoIP) conferenceto capitalize on that market’s huge supply/demand perspective it’s horrible calls. The company also created apotential. Something they could simply for investors. You went from having sandbox application for developersnot have accomplished alone. In China, four or five guys to a multiple order and customers to share and explorethere are 100 million Internet users and of magnitude—now all of a sudden applications.360 million mobile users, giving them there have been five comparisonthe highest mobile phone to Internet shopping deals funded after the first “For the vendors, getting greateruser ratio and twice as many phone three have all been sold—which is a revenues over time offers a moreusers as in the US.” bizarre thing. predictable model in terms of forecasting what those revenues mightRemember the consumer “So, I find it more of a time to be be,” says Petracca. “It also givesmarket? cautious rather than opportunistic,” companies a better way to reach the concludes Gurley. “Not because of the small business marketplace becauseNot everyone will tell you how they opportunity side, which is improving, of the user’s lower entry cost.”really feel about Internet investing quite but it’s not improving at the rate atthe way Gurley can: “Stocks are doing which the supply side of venture capital “If you go back as far as ’97-’98well, there have been some Internet has grown.” people started talking about softwareIPOs and M&A exits and companies as a service and for various reasons,are making profits—nice profits,” Beyond the browser including the bust, that theory didn’tGurley intones. Here’s the other shoe. live up to expectations as much asThe ‘I told you so’: Online platforms are very Web 2.0 it should have,” says Bill Gurley, and at the heart of supporting the general partner, Benchmark Capital.“I think the venture industry broadly application service provider (ASP) “Fast forward to today and look at theran away from consumer Internet business model. Consider bubble- success of Salesforce.com and otherswhen the bubble burst, because when survivor Salesforce.com, which was like Websense and Websidestory—the bubble burst consumer Internet designed from scratch to run over the that clearly is a business model thatwent first—it ended up being that Internet. Back in 2000 nextwave spoke Wall Street loves. The multiples aretelecom equipment was three times with Salesforce.com’s co-founder, incredibly high.”the whole consumer Internet—but chairman, and CEO, Marc Benioff,consumer Internet always had a taint and included his announcement that Like Microsoft and IBM have done withto it. Dot-com became a euphemism his pure-play sales-force automation independent software vendors, thefor bad business. And so many VCs software company planned “to offer Salesforce platform model incorporatesran away—I think there were four or a complete customer relationship selected application service vendorsfive of us that kept after consumer management environment, including more tightly into its application andInternet. They were going back to sales-force automation, customer infrastructure ecosystem in an on-our core, which was what they call support, and marketing services.” demand (or SaaS) framework. www.pwcnextwave.com 5
  • 9. “Reaching customers was the disruptive force that drove the first Internet boom.” Tim O’Brien, MicrosoftMicrosoft plans to hold a Web for two years now,” says Costolo. and other devices; it’s about how todeveloper and designer conference “We are absolutely of the belief that make that information most relevant toin March called MIX ’06 (www.mix06. publishers have to syndicate their users. We have a clear path forward ascom) to outline the company’s current content, distribute it, and attach Microsoft embraces RSS.”and future investments in Web platform monetization mechanisms to it thattechnologies. O’Reilly Media Inc. assume it will be consumed far away Can you be too thin or too rich?President and CEO, Tim O’Reilly, who from the originating site or source. It’spublished the 16-page piece, “What is just the beginning of innovations that In the Web 2.0 environment, you’llWeb 2.0: Design Patterns and Business will offer publishers and subscribers be hearing a lot about the notion thatModels for the Next Generation of the option of becoming untethered given the rich interactivity and all theSoftware,” on his company’s Web site from proprietary systems.” bandwidth out there all you need is ain September, will have a dialogue with browser and a “thin client,” a serverBill Gates at MIX ’06. J.B. Holston, CEO of Newsgator.com, without any real software on it. an early RSS technology adopter and“Microsoft had made a number rapid innovator, says he really hopes “That’s not true,” says O’Brien. “It’s notof investments in Web tools and Microsoft’s upcoming IE 7 and Vista an either/or world. Reaching customerstechnologies long before Web 2.0 releases do speed up RSS adoption was the disruptive force that drove thestarted making these headlines,” exponentially. “MS has been a great first Internet boom,” he explains. “Now,says Tim O’Brien, group manager of ‘partner’ to us, in a ton of ways; one of user experience on the client becomesPlatform Strategy for Microsoft. “We which has been to share their roadmap the unique differentiator. Internet reachannounced enhanced tools for Web openly. We build everything we do on has become a commodity,” he asserts,development and tools for graphic Microsoft technologies and, as a result, noting the proliferation of desk bars,design at our Professional Developers’ they’ve been very open with us as we tool bars, task bars, sidebars, andConference this past September. Our build our company because it’s good other client-side pieces of technology.investments on the services side, even for them to have companies using their “Skype is a Win32 application thatthe more recent ones announced in technology do well,” says Holston, who runs on the client. The Google toolbarNovember—Windows Live and Office is no stranger to navigating corporate is an application that runs on theLive—are platform plays.” When networks. Holston started Yahoo! client. Most of what Google andInternet Explorer 7 and Windows Vista Europe, the joint venture between Yahoo! announced at the Computerroll-out this year, O’Brien says: “The Yahoo! and Ziff Davis, which he was Electronics Show was all client-sideRSS capabilities in [these products] running in Europe at the time. “If you’re technologies that run on the PC. I thinkare going to make what is a Web 2.0 a start-up, the big thing you have to it’s interesting that Salesforce wouldtechnology still in quasi-early stage do when you are potentially competing have a Microsoft Outlook edition ofof adoption available to hundreds of in Microsoft space is to just innovate their product,” he remarks, alluding tomillions of people… If you’re a VC faster than they do… The best position Salesforce.com’s long-time campaignlooking at an early-stage company who you can be in is if you’ve got a close for The End of Software.is saying, ‘I pull traffic into my site; I sell relationship with them so you canads; and I’ve got this really cool RSS know where they’re going, but you The emphasis on client experiencecapability’… If people stop visiting that still have to cycle your products much is apparent as Microsoft expands itssite because they can just subscribe to more quickly than they can. That’s our outreach from independent, high-levelwhat they need, they’ve got a business competitive advantage. We’re always software developers to include front-model issue to think through.” going to be a higher end, richer way to end graphics designers and illustrators present the most relevant text, audio, while fine-tuning its new ExpressionKeeping just the right distance ahead and video to users,” he explains. Interactive Designer and Expressionof democratization is how forward- Graphic Designer developmentlooking companies, like FeedBurner, “It’s not just a question of how to tools for Web and Windows design.must think. “FeedBurner has been aggregate, serve up, and synchronize Microsoft’s Mix ’06 conference ininnovating on ad insertion into feeds feeds over mobile phones, computers, March will address optimizing the continues on page 196 Issue 4: 2005
  • 10. This special report, covering 2004 to 2005, provides detailed results of Q4 2005, summary findings for full-year 2005, and an additional year of trends. More detailed results, including an electronic version of this report, can be found on the MoneyTree™ Web site at www.pwcmoneytree.com. Directory Tracy T. Lefteroff Kirk Walden tracy.t.lefteroff@us.pwc.com kirk.walden@us.pwc.com Total equity investments into venture-backed companies Investments in the fourth quarter of 2005 totaled $5.1 marked the first increase in venture capital investing billion in 709 deals, down slightly from $5.4 billion in Q3 after three years of consecutive declines. Funding for 2005, but well within the range of investment levels seen later stage companies rose markedly in 2005 to $9.7 over the past 14 quarters. billion, while the number of companies getting venture capital for the first time increased to 901, continuing In 2005, venture capitalists matched 2004 by investing a steady year-over-year rise. Both measures were $21.7 billion in 2,939 deals. Full-year 2004’s $21.6 billion four-year highs. 2000 2001 2002 2003 2004 2005 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 30 29 28.078 28 27 26.312 26 27.910 25 24 23 22 22.400 21 20 19 $ in billions 18 17 16 15 14 13 11.313 12 12.970 11 10 9 8.056 8 7 8.365 5.999 6.148 6.164 4.932 5.543 5.676 5.084 6 6.699 4.435 5 4 5.105 4.988 5.445 4.565 4.342 4.768 4.706 3 2 1 0 2,085 2,083 1,912 1,729 1,274 1,218 997 967 819 840 685 713 684 723 699 759 680 826 662 798 704 784 742 709 total # of deals*connectedthinking
  • 11. Investments by industry 2004 to 2005 The Life Sciences sector (Biotechnology and Medical Devices industries, together) inched up to a five-year high in 2005 with $6.0 billion in 608 deals compared to $5.8 billion in 589 deals in 2004. Software investments slipped 10% in 2005 to $4.7 billion in 840 deals, yet easily held its position as the largest single industry category for the year, capturing 22% of total dollars and 29% of all deals. The Networking industry continued its slide, ending at $1.4 billion in 2005, an eight-year low point. The Telecommunications industry’s Wireless subcategory has become a hot spot. For full-year 2005, 152 wireless-related companies received $1.3 billion, a 24% increase over 2004’s $1.1 billion. This increase pushed the Telecommunications category to a three- year high of $2.1 billion in 2005. 2005 2004 $ in millions 0 500 1,000 1,500 2,000 2,500 # of deals 840 4,703.6 Software 886 5,246.3 357 3,861.6 Biotechnology 340 4,147.0 247 2,129.2 Telecommunications 236 1,946.8 251 2,114.1 Medical Devices and Equipment 249 1,705.5 210 1,778.2 Semiconductors 239 2,077.8 157 1,402.1 Networking and Equipment 183 1,554.3 149 945.1 Media and Entertainment 116 900.2 130 921.1 IT Services 131 612.6 123 740.5 Industrial/Energy 131 646.6 56 643.6 Financial Services 70 435.2 89 515.4 Business Products and Services 80 461.0 59 467.5 Computers and Peripherals 69 592.7 67 436.8 Healthcare Services 68 420.6 83 387.4 Electronics/Instrumentation 65 383.0 73 362.0 Consumer Products and Services 60 297.2 43 270.5 Retailing/Distribution 40 207.4 5 1.5 Undisclosed/Other 3 1.1 2,939 21,680.0 Grand Total 2,966 21,635.3 0 500 1,000 1,500 2,000 2,500 $ in millions Definitions of the industry categories can be found on the MoneyTree™ Web site at www.pwcmoneytree.com.Data is current as of January 24, 2006. PricewaterhouseCoopers and the National Venture Capital Association have taken responsible steps to ensure that the information contained in the MoneyTree Report has been obtained from reliablesources. However, neither of the parties nor Thomson Financial can warrant the ultimate validity of the data obtained in this manner. Results are updated periodically. Therefore, all data is subject to change at any time.©2006 PricewaterhouseCoopers, LLP. All rights reserved. “PricewaterhouseCoopers” refers to the PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopersInternational Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US).8 Q4 2005 MoneyTreeTM Report
  • 12. Investments by industry Q4 2004, Q3 2005, Q4 2005 The Life Sciences sector (Biotechnology and Medical Devices industries, together) continued its dominance in Q4 2005. Investments in the sector totaled $1.7 billion or one-third of all venture capital invested during the quarter. This represents the largest portion of overall investing the sector has attracted in a single quarter. Half of the top ten industries experienced an increase in financing from the prior quarter. The Industrial/Energy, Business Products/Services, and IT Services industries experienced the largest gains in the fourth quarter, up modestly from Q3 2005. Q4 05 Q3 05 Q4 04 $ in millions 0 100 200 300 400 500 600 # of deals 95 1,068.8 Biotechnology 94 1,024.2 101 1,266.1 192 1,036.6 Software 201 1,133.7 238 1,407.5 65 613.0 Medical Devices and Equipment 69 604.0 65 445.5 62 517.1 Telecommunications 68 586.9 55 413.4 46 425.1 Semiconductors 56 531.7 71 576.1 27 210.3 IT Services 34 195.5 42 168.7 37 194.8 Media and Entertainment 37 197.5 31 294.1 29 188.8 Networking and Equipment 33 354.0 41 283.9 35 186.0 Industrial/Energy 33 154.5 37 168.7 27 133.5 Business Products and Services 24 122.0 13 31.3 14 126.7 Computers and Peripherals 12 66.1 17 93.5 20 105.2 Electronics/Instrumentation 19 96.1 15 95.4 17 102.5 Healthcare Services 16 67.5 16 97.2 18 80.2 Consumer Products and Services 18 97.6 18 97.2 12 51.3 Financial Services 13 81.7 25 164.7 11 42.7 Retailing/Distribution 14 131.8 11 72.0 2 1.5 Undisclosed/Other 1 0.0 2 0.6 709 5,084.1 Grand Total 742 5,444.7 798 5,675.7 0 100 200 300 400 500 600 $ in millions Definitions of the industry categories can be found on the MoneyTree™ Web site at www.pwcmoneytree.com.Data is current as of January 24, 2006. PricewaterhouseCoopers and the National Venture Capital Association have taken responsible steps to ensure that the information contained in the MoneyTree Report has been obtained from reliablesources. However, neither of the parties nor Thomson Financial can warrant the ultimate validity of the data obtained in this manner. Results are updated periodically. Therefore, all data is subject to change at any time.©2006 PricewaterhouseCoopers, LLP. All rights reserved. “PricewaterhouseCoopers” refers to the PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopersInternational Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US). www.pwcmoneytree.com 9
  • 13. Investments by region 2004 to 2005 Of the ten regions garnering the largest amounts of venture capital in 2005, three experienced double-digit increases in investing over the prior year. LA/Orange County chalked up a 58% increase in investment levels from 2004, while the Midwest and NY Metro regions both attracted 17% and 12% more dollars, respectively, than in the prior year. During 2005, Silicon Valley dominated the attention of investors as 35% of all US venture capital was invested in the region. Taken together, the top three regions—Silicon Valley, New England, and NY Metro—accounted for 55% of the dollars invested and 49% of the deals reported in 2005. 2005 2004 $ in millions 0 500 1,000 1,500 2,000 # of deals 895 7,622.8 Silicon Valley 913 7,808.0 385 2,618.4 New England 395 3,074.4 164 1,690.4 NY Metro 204 1,504.7 176 1,484.0 LA/Orange County 138 937.9 202 1,215.3 Southeast 221 1,259.5 158 1,068.9 Texas 157 1,099.0 122 1,032.8 San Diego 122 1,212.3 150 913.8 Northwest 146 977.8 184 885.2 DC/Metroplex 165 961.6 144 773.5 Midwest 151 660.0 91 687.8 Philadelphia Metro 95 689.2 75 611.7 Colorado 68 413.3 79 590.3 Southwest 52 331.1 60 314.0 North Central 68 425.0 15 79.9 Sacramento/N.Cal 8 47.9 30 58.9 Upstate NY 29 106.3 5 17.0 AK/HI/PR 5 15.1 4 15.1 South Central 24 110.5 0 0.0 Other US 5 1.5 2,939 21,680.0 Grand Total 2,966 21,635.3 0 500 1,000 1,500 2,000 $ in millionsData is current as of January 24, 2006. PricewaterhouseCoopers and the National Venture Capital Association have taken responsible steps to ensure that the information contained in the MoneyTree Report has been obtained from reliablesources. However, neither of the parties nor Thomson Financial can warrant the ultimate validity of the data obtained in this manner. Results are updated periodically. Therefore, all data is subject to change at any time.©2006 PricewaterhouseCoopers, LLP. All rights reserved. “PricewaterhouseCoopers” refers to the PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopersInternational Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US).10 Q4 2005 MoneyTreeTM Report
  • 14. Investments by region Q4 2004, Q3 2005, Q4 2005 Seven of the ten largest regions in Q4 2005 recorded an increase in investing over the prior quarter. Investment levels in Texas—capturing $296 million—increased by 43% while San Diego attracted 22% more than Q3 2005. Taken together, the top three regions in Q4 2005—Silicon Valley, New England, and Texas— accounted for 55% of the dollars invested and 50% of the deals reported. Q4 05 Q3 05 Q4 04 $ in millions 0 100 200 300 400 500 # of deals 222 1,779.0 Silicon Valley 230 2,110.5 248 1,951.8 93 702.6 New England 93 622.3 109 806.1 42 295.5 Texas 37 207.0 41 271.4 37 286.5 NY Metro 43 283.2 49 265.2 34 278.2 LA/Orange County 47 360.4 40 299.4 39 270.7 Northwest 35 241.3 34 181.7 31 266.7 San Diego 36 219.2 40 351.8 40 235.3 Southeast 62 448.8 61 433.3 51 225.0 DC/Metroplex 40 209.3 46 409.3 23 178.0 Philadelphia Metro 17 164.0 20 124.7 33 176.1 Midwest 36 130.7 39 225.9 19 121.0 Southwest 19 181.8 9 83.1 17 119.7 North Central 11 59.2 17 105.3 16 115.3 Colorado 21 175.1 21 93.5 2 14.0 Sacramento/N.Cal 3 9.2 3 16.1 1 10.2 AK/HI/PR 1 3.8 2 5.6 8 8.6 Upstate NY 10 17.9 6 7.9 1 1.5 South Central 1 1.0 10 43.1 0 0.0 Other US 0 0.0 3 0.4 709 5,084.1 Grand Total 742 5,444.7 798 5,675.7 0 100 200 300 400 500 $ in millionsData is current as of January 24, 2006. PricewaterhouseCoopers and the National Venture Capital Association have taken responsible steps to ensure that the information contained in the MoneyTree Report has been obtained from reliablesources. However, neither of the parties nor Thomson Financial can warrant the ultimate validity of the data obtained in this manner. Results are updated periodically. Therefore, all data is subject to change at any time.©2006 PricewaterhouseCoopers, LLP. All rights reserved. “PricewaterhouseCoopers” refers to the PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopersInternational Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US). www.pwcmoneytree.com 11
  • 15. Investments by state 2004 to 2005 2005 2004 $ in millions 0 250 500 750 1,000 # of deals 1,208 10,219.5 California 1,181 10,006.2 331 2,352.1 Massachusetts 348 2,811.9 158 1,068.9 Texas 157 1,099.0 124 1,042.2 New York 147 726.5 77 823.1 New Jersey 86 959.3 114 736.3 Washington 114 825.2 75 611.7 Colorado 68 413.3 56 507.5 North Carolina 315.5 53 74 469.5 Pennsylvania 560.9 91 97 442.6 Maryland 580.8 84 74 401.7 Virginia 300.1 71 55 361.2 Florida 318.1 58 60 261.7 Georgia 524.4 76 30 249.1 Utah 197.9 28 51 241.1 Illinois 223.5 52 44 227.9 Minnesota 353.5 50 29 194.0 Connecticut 180.4 32 26 148.0 Arizona 69.7 10 28 138.1 Oregon 148.7 29 31 119.3 Ohio 57.0 31 12 117.4 Missouri 31.0 11 26 112.6 New Hampshire 154.8 26 7 104.9 Nevada 39.5 6 10 95.6 Indiana 67.3 9 21 89.0 Michigan 131.8 19 16 88.4 New Mexico 24.0 8 13 77.1 Rhode Island 45.4 7 12 67.9 Wisconsin 57.1 10 23 65.6 Tennessee 80.5 23 5 35.2 Vermont 5.1 4 52 211.0 Undisclosed/Other 327.1 77 2,939 21,680.0 Grand Total 21,635.3 2,966 0 250 500 750 1,000 $ in millionsData is current as of January 24, 2006. PricewaterhouseCoopers and the National Venture Capital Association have taken responsible steps to ensure that the information contained in the MoneyTree Report has been obtained from reliablesources. However, neither of the parties nor Thomson Financial can warrant the ultimate validity of the data obtained in this manner. Results are updated periodically. Therefore, all data is subject to change at any time.©2006 PricewaterhouseCoopers, LLP. All rights reserved. “PricewaterhouseCoopers” refers to the PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopersInternational Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US).12 Q4 2005 MoneyTreeTM Report
  • 16. Investments by state Q4 2004, Q3 2005, Q4 2005 Q4 05 Q3 05 Q4 04 $ in millions 0 100 200 300 400 # of deals 289 2,337.9 California 316 2,699.3 331 2,619.1 86 660.7 Massachusetts 76 532.7 98 753.2 42 295.5 Texas 37 207.0 41 271.4 31 236.6 Washington 25 179.0 28 162.3 32 190.7 New York 33 141.6 36 134.6 30 154.5 Maryland 23 125.8 24 283.0 17 121.8 Pennsylvania 14 96.9 17 123.9 16 115.3 Colorado 21 175.1 21 93.5 16 109.9 New Jersey 20 191.8 16 110.0 11 91.2 North Carolina 18 175.4 14 111.7 9 66.8 Illinois 13 28.4 13 78.9 7 60.9 New Mexico 3 13.3 3 11.0 17 56.2 Virginia 15 81.9 18 83.1 12 56.0 Georgia 15 100.8 18 166.6 10 55.8 Florida 21 159.7 15 100.7 9 55.0 Minnesota 7 49.5 10 75.0 6 52.6 Wisconsin 3 9.7 4 24.8 5 51.1 Connecticut 8 59.9 8 47.9 5 42.9 Missouri 3 26.4 5 5.4 5 39.7 New Hampshire 9 37.3 7 32.9 8 39.5 Michigan 4 15.2 7 81.8 6 28.1 Oregon 8 39.3 6 19.4 5 26.0 Utah 6 30.1 4 49.6 4 23.5 Tennessee 6 9.4 6 35.5 4 23.2 Arizona 7 51.3 0 0.0 1 14.0 Delaware 2 4.7 0 0.0 2 12.8 Washington, DC 2 1.6 2 38.0 2 12.1 Iowa 1 0.0 2 5.4 6 12.0 Ohio 7 9.4 9 16.0 3 11.0 Nevada 3 87.1 2 22.5 13 30.8 Undisclosed/Other 16 105.3 33 118.7 709 5,084.1 Total 742 5,444.7 798 5,675.7 0 100 200 300 400 $ in millionsData is current as of January 24, 2006. PricewaterhouseCoopers and the National Venture Capital Association have taken responsible steps to ensure that the information contained in the MoneyTree Report has been obtained from reliablesources. However, neither of the parties nor Thomson Financial can warrant the ultimate validity of the data obtained in this manner. Results are updated periodically. Therefore, all data is subject to change at any time.©2006 PricewaterhouseCoopers, LLP. All rights reserved. “PricewaterhouseCoopers” refers to the PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopersInternational Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US). www.pwcmoneytree.com 13
  • 17. Investments by stage of development For full-year 2005, Later stage funding rose 22% to $9.7 billion in 952 deals compared to $8.0 billion in 2004. More notably, Later stage accounted for 45% of all venture capital dollars, the highest proportion in the 11- year history of MoneyTree research. The continuing shift toward Later stage investing over the past five years reflects venture capitalists ongoing support of existing portfolio companies via additional follow-on rounds. Funding for Start-Up and Early stage companies slipped only slightly to $4.1 billion in 922 deals compared to $4.4 billion in 2004, indicating sustained interest in longer term investment horizons. As activity remained focused on opposite ends of the barbell, investing in Expansion stage companies fell to its lowest point in nine years: $7.8 billion in 1,065 deals. In 2004, 1,195 Expansion stage deals amounted $9.3 billion. 2004 to 2005 2005 2004 $ in millions 0 1,000 2,000 3,000 4,000 5,000 # of deals 175 735.9 Startup/Seed 185 406.6 747 3,396.2 Early Stage 853 3,986.7 1,065 7,821.0 Expansion 1,195 9,257.0 952 9,727.0 Later Stage 733 7,985.0 2,939 21,680.0 Grand Total 2,966 21,635.3 0 1,000 2,000 3,000 4,000 5,000 $ in millions Q4 2004, Q3 2005, Q4 2005 Q4 05 Q3 05 Q4 04 $ in millions 0 500 1,000 1,500 # of deals 42 75.1 Startup/Seed 49 98.2 47 120.7 174 882.4 Early Stage 178 938.4 221 1,070.6 254 1,837.3 Expansion 252 1,709.8 301 2,177.4 239 2,289.2 Later Stage 263 2,698.3 229 2,307.0 709 5,084.1 Grand Total 742 5,444.7 798 5,675.7 0 500 1,000 1,500 $ in millions Definitions of the stage of development categories can be found on the MoneyTree™ Web site at www.pwcmoneytree.com.Data is current as of January 24, 2006. PricewaterhouseCoopers and the National Venture Capital Association have taken responsible steps to ensure that the information contained in the MoneyTree Report has been obtained from reliablesources. However, neither of the parties nor Thomson Financial can warrant the ultimate validity of the data obtained in this manner. Results are updated periodically. Therefore, all data is subject to change at any time.©2006 PricewaterhouseCoopers, LLP. All rights reserved. “PricewaterhouseCoopers” refers to the PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopersInternational Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US).14 Q4 2005 MoneyTreeTM Report
  • 18. Investments by sequence of financing New investments by venture capitalists hit a four-year high with 901 companies receiving their first round of institutional venture capital for a total of $5.3 billion in 2005. Last year, 865 companies attracted $4.6 billion. The increase reflects venture capital firms’ appetite for fresh ideas to balance existing investments. A total of 236 companies received financing for the first time in Q4 2005, down slightly from 225 companies during Q3, with the amount invested practically unchanged at $1.2 billion. 2004 to 2005 2005 2004 $ in millions 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 # of deals 901 5,283.2 First 865 4,608.5 1,021 7,715.0 Second & Third 1,015 7,897.8 740 6,535.7 Fourth, Fifth, & Sixth 835 7,565.6 277 2,146.1 Seventh & Beyond 251 1,563.4 2,939 21,680.0 Total 2,966 21,635.3 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 $ in millions Q4 2004, Q3 2005, Q4 2005 Q4 05 Q3 05 Q4 04 $ in millions 0 500 1,000 1,500 # of deals 236 1,193.6 First 225 1,218.8 236 1,207.0 230 1,913.5 Second & 260 1,915.0 Third 254 2,056.9 169 1,418.3 Fourth, Fifth, 186 1,615.0 & Sixth 234 1,967.8 74 558.6 Seventh 71 695.9 & Beyond 74 444.0 709 5,084.1 Total 742 5,444.7 798 5,675.7 0 500 1,000 1,500 $ in millions Definitions of the sequence of financing categories can be found on the MoneyTree™ Web site at www.pwcmoneytree.com.Data is current as of January 24, 2006. PricewaterhouseCoopers and the National Venture Capital Association have taken responsible steps to ensure that the information contained in the MoneyTree Report has been obtained from reliablesources. However, neither of the parties nor Thomson Financial can warrant the ultimate validity of the data obtained in this manner. Results are updated periodically. Therefore, all data is subject to change at any time.©2006 PricewaterhouseCoopers, LLP. All rights reserved. “PricewaterhouseCoopers” refers to the PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopersInternational Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US). www.pwcmoneytree.com 15
  • 19. Full-year 2005 most active venture investors The most active venture investors in the US closed 16 or more deals each during 2005. Of the more than 8,600 transactions reported in 2005, the most active firms accounted for 2,762, approximately 32% of the total. The top 10 firms accounted for about 7% of the deals completed during the year. Draper Fisher Jurvetson topped the 2005 list with a total of 80 deals made during the year. New Enterprise Associates came in next with 73 deals. U.S. Venture Partners, Venrock Associates, Polaris Venture Partners and Sequoia Capital were also at the top of the list, reporting more than 49 deals each in 2005. # of # ofInvestor Location Deals Investor Location DealsDraper Fisher Jurvetson Menlo Park, CA 80 MD Technology Development Corporation Columbia, MD 24New Enterprise Associates Baltimore, MD 73 General Catalyst Partners Cambridge, MA 24U.S. Venture Partners Menlo Park, CA 71 Palomar Ventures Santa Monica, CA 24Venrock Associates New York, NY 59 Prospect Venture Partners Palo Alto, CA 24Sequoia Capital Menlo Park, CA 49 Motorola Ventures Schaumburg, IL 24Polaris Venture Partners Waltham, MA 49 Oxford Bioscience Partners Boston, MA 24Kleiner Perkins Caufield & Byers Menlo Park, CA 48 Walden International San Francisco, CA 24Intel Capital Santa Clara, CA 47 Mohr Davidow Ventures Menlo Park, CA 24Accel Partners Palo Alto, CA 46 Sigma Partners Menlo Park, CA 23Morgenthaler Ventures Menlo Park, CA 45 EnerTech Capital Wayne, PA 23TL Ventures Wayne, PA 43 Pequot Capital Management Westport, CT 23Mayfield Fund Menlo Park, CA 42 Norwest Venture Partners Palo Alto, CA 22Village Ventures Williamstown, MA 42 SV Life Sciences Advisers Boston, MA 22Domain Associates Princeton, NJ 42 Ignition Partners Bellevue, WA 22InterWest Partners Menlo Park, CA 40 Rho Ventures New York, NY 22North Bridge Venture Partners Waltham, MA 40 Bay Partners Cupertino, CA 21Menlo Ventures Menlo Park, CA 39 CMEA Ventures San Francisco, CA 21Canaan Partners Rowayton, CT 38 St. Paul Venture Capital Eden Prairie, MN 21Sevin Rosen Funds Dallas, TX 38 Alloy Ventures Palo Alto, CA 21Benchmark Capital Menlo Park, CA 37 VantagePoint Venture Partners San Bruno, CA 21Redpoint Ventures Menlo Park, CA 37 J.P. Morgan Partners New York, NY 21Oak Investment Partners Westport, CT 36 Labrador Ventures Palo Alto, CA 21Austin Ventures, L.P. Austin, TX 35 Blue Chip Venture Company Cincinnati, OH 21MPM Capital Boston, MA 35 Goldman, Sachs & Co. New York, NY 20Enterprise Partners Venture Capital La Jolla, CA 35 Solstice Capital Boston, MA 20Bessemer Venture Partners Larchmont, NY 34 Intersouth Partners Durham, NC 20ComVentures Palo Alto, CA 34 Sierra Ventures Menlo Park, CA 20Greylock Waltham, MA 34 Warburg Pincus New York, NY 19Highland Capital Partners Lexington, MA 34 Lightspeed Venture Partners Menlo Park, CA 19Frazier Healthcare and Technology Ventures Seattle, WA 32 Globespan Capital Partners Boston, MA 19Mobius Venture Capital Palo Alto, CA 32 Matrix Partners Waltham, MA 19Sutter Hill Ventures Palo Alto, CA 31 Columbia Capital Alexandria, VA 19Three Arch Partners Portola Valley, CA 31 Wasatch Venture Fund Salt Lake City, UT 19ARCH Venture Partners Chicago, IL 29 Prism Venture Partners Westwood, MA 19Atlas Venture, Ltd. Waltham, MA 29 The Venture Capital Fund of New England Wellesley, MA 183i (US) Waltham, MA 29 El Dorado Ventures Menlo Park, CA 18MD Dept. of Business & Economic Development Baltimore, MD 29 River Cities Capital Funds Cincinnati, OH 18Battery Ventures Wellesley, MA 29 Delphi Ventures Menlo Park, CA 17Advanced Technology Ventures Waltham, MA 27 Kodiak Venture Partners Waltham, MA 17BA Venture Partners Foster City, CA 27 Storm Ventures Menlo Park, CA 17Foundation Capital Menlo Park, CA 27 Bain Capital Boston, MA 17Alta Partners San Francisco, CA 27 Trident Capital Palo Alto, CA 17Sanderling Ventures San Mateo, CA 27 Noro-Moseley Partners Atlanta, GA 17Flagship Ventures Cambridge, MA 25 Centennial Ventures Denver, CO 16Novak Biddle Venture Partners Bethesda, MD 25 De Novo Ventures Menlo Park, CA 16Versant Ventures Menlo Park, CA 25 Rustic Canyon Partners Santa Monica, CA 16DCM - Doll Capital Management Menlo Park, CA 25 Band of Angels Menlo Park, CA 16Charles River Ventures Waltham, MA 24Data is current as of January 24, 2006. PricewaterhouseCoopers and the National Venture Capital Association have taken responsible steps to ensure that the information contained in the MoneyTree Report has been obtained from reliablesources. However, neither of the parties nor Thomson Financial can warrant the ultimate validity of the data obtained in this manner. Results are updated periodically. Therefore, all data is subject to change at any time.©2006 PricewaterhouseCoopers, LLP. All rights reserved. “PricewaterhouseCoopers” refers to the PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopersInternational Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US).16 Q4 2005 MoneyTreeTM Report
  • 20. Q4 2005 most active venture investors The most active venture investors in the US closed five or more deals each in Q4 2005. Of the more than 2,090 transactions reported in Q4 2005, the most active firms accounted for 639, approximately 31% of the total. The top 10 firms accounted for 8% of the deals completed in the quarter. Draper Fisher Jurvetson topped the list with a total of 22 deals, while New Enterprise Associates came in next with 18 deals. Venrock Associates and Polaris Venture Partners were also at the top of the Q4 2005 list, reporting 15 or more deals each during the quarter. # of # ofInvestor Location Deals Investor Location DealsDraper Fisher Jurvetson Menlo Park, CA 22 Accel Partners Palo Alto, CA 7New Enterprise Associates Baltimore, MD 18 Domain Associates Princeton, NJ 7Venrock Associates New York, NY 17 Morgenthaler Ventures Menlo Park, CA 7Polaris Venture Partners Waltham, MA 15 Mohr Davidow Ventures Menlo Park, CA 7Menlo Ventures Menlo Park, CA 14 Greylock Waltham, MA 7U.S. Venture Partners Menlo Park, CA 14 Advanced Technology Ventures Waltham, MA 6Intel Capital Santa Clara, CA 14 Battery Ventures, L.P. Wellesley, MA 6TL Ventures Wayne, PA 14 Oak Investment Partners Westport, CT 6Kleiner Perkins Caufield & Byers Menlo Park, CA 12 CMEA Ventures San Francisco, CA 6Sequoia Capital Menlo Park, CA 12 Intersouth Partners Durham, NC 6MD Dept. of Business & Economic Development Baltimore, MD 12 MD Technology Development Corporation Columbia, MD 6InterWest Partners Menlo Park, CA 11 Storm Ventures Menlo Park, CA 6Mayfield Fund Menlo Park, CA 11 Stonehenge Capital Company Baton Rouge, LA 6Village Ventures Williamstown, MA 11 Azure Capital Partners San Francisco, CA 6Redpoint Ventures Menlo Park, CA 11 General Catalyst Partners Cambridge, MA 6MPM Capital Boston, MA 11 Alloy Ventures Palo Alto, CA 6Sevin Rosen Funds Dallas, TX 11 Pequot Capital Management Westport, CT 6Atlas Venture Waltham, MA 10 Prospect Venture Partners Palo Alto, CA 63i (US) Waltham, MA 10 Mobius Venture Capital Palo Alto, CA 6North Bridge Venture Partners Waltham, MA 10 August Capital Management Menlo Park, CA 6Frazier Healthcare and Technology Ventures Seattle, WA 10 Labrador Ventures Palo Alto, CA 6Austin Ventures Austin, TX 10 Motorola Ventures Schaumburg, IL 6BA Venture Partners Foster City, CA 9 Oxford Bioscience Partners Boston, MA 6Canaan Partners Rowayton, CT 9 Warburg Pincus New York, NY 6De Novo Ventures Menlo Park, CA 9 Goldman, Sachs & Co. New York, NY 5Alta Partners San Francisco, CA 9 Rho Ventures New York, NY 5Three Arch Partners Portola Valley, CA 9 Sierra Ventures Menlo Park, CA 5Bessemer Venture Partners Larchmont, NY 8 Paladin Capital Management Washington, DC 5Flagship Ventures Cambridge, MA 8 Ignition Partners Bellevue, WA 5Tech Coast Angels Laguna Hills, CA 8 Sherbrooke Capital Partners Newton Lower Falls, MA 5Sutter Hill Ventures Palo Alto, CA 8 ProQuest Investments Princeton, NJ 5VantagePoint Venture Partners San Bruno, CA 8 IDG Ventures Boston Boston, MA 5Walden International San Francisco, CA 8 RRE Ventures LLC New York, NY 5ARCH Venture Partners Chicago, IL 7 Advantage Capital Partners New Orleans, LA 5ComVentures Palo Alto, CA 7 Foundation Capital Menlo Park, CA 5Bay Partners Cupertino, CA 7 Trident Capital Palo Alto, CA 5Palomar Ventures Santa Monica, CA 7 Vanguard Ventures Palo Alto, CA 5EnerTech Capital Wayne, PA 7 Trinity Ventures Menlo Park, CA 5River Cities Capital Funds Cincinnati, OH 7 Highland Capital Partners Lexington, MA 5Data is current as of January 24, 2006. PricewaterhouseCoopers and the National Venture Capital Association have taken responsible steps to ensure that the information contained in the MoneyTree Report has been obtained from reliablesources. However, neither of the parties nor Thomson Financial can warrant the ultimate validity of the data obtained in this manner. Results are updated periodically. Therefore, all data is subject to change at any time.©2006 PricewaterhouseCoopers, LLP. All rights reserved. “PricewaterhouseCoopers” refers to the PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopersInternational Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US). www.pwcmoneytree.com 17
  • 21. Funds raised by venture capital firms Q1 2003 to Q4 2005 A healthy fundraising climate in the fourth quarter of 2005 capped off the most active year for venture capital commitments since 2001, according to Thomson Venture Economics and the National Venture Capital Association. In the fourth quarter, 51 venture funds raised $6.7 billion. The entire year saw 183 funds raise $25.2 billion, the highest yearly total for venture capital firms since 2001 when 309 funds raised $38 billion. 2003 2004 2005 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 8,000 7,304.5 6,449.3 6,710.1 6,400 5,719.7 5,366.5 5,808.7 5,387.9 4,800 $ in millions 3,200 2,724.9 3,352.3 3,094.6 1,600 2,018.6 1,216.7 0 45 46 34 60 55 57 60 66 59 56 57 51 total # of deals Source: Thomson Financial Venture Economics/National Venture Capital Association Note: The figures take into account the subtractive effect of downsized funds. Disclaimer: Data is current as of February 3, 2006. Data is continuously updated and is therefore subject to change. Copyright 2006 Thomson Financial. All Rights Reserved. Venture-backed initial public offerings Q1 2003 to Q4 2005 Seventeen venture-backed companies raised $1.6 billion through Initial Public Offerings (IPOs) in the fourth quarter of 2005. The fourth quarter IPO activity mirrored full-year 2005 which was characterized by a significantly weak IPO market. For the full-year 2005, 56 venture-backed IPOs raised a total of $4.5 billion, representing a 40% decline in volume from 2004. 2003 2004 2005 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 4000 3,225.6 2,990.4 2,721.1 3000 $ in millions 2000 2,077.8 1,458.1 1,568.1 1000 1,048.7 164.0 732.8 720.7 714.1 77.2 0 1 2 9 17 13 29 24 27 10 10 19 17 # of companies that went public Source: Thomson Financial Venture Economics/National Venture Capital Association Disclaimer: Data is current as of January 3, 2006. Data is continuously updated and is therefore subject to change. Copyright 2006 Thomson Financial. All Rights Reserved. BS-BS-06-0443-A.02/06.LMT18 Q4 2005 MoneyTreeTM Report
  • 22. user experience using both the refreshed and repainted like the clunky nextwave feature contributor, Janice K. Mandel,browser and the rich client software. old Web mail products,” says Ciesinski. is an independent writer specializing in fast-growth businesses and the people whoDFJ’s Stavropoulous, who notes “In this environment, the whole page make them run. She can be reached atthat Google is “clearly going after metaphor is irrelevant. There’s no back mandel.schneider@erols.com.the desktop” isn’t convinced about button. Everything is drop and drag. It’sMicrosoft’s mixed approach for a full application and it happens to live Directoryoptimizing the user experience. “There on the Web.” STEVE CIESINSKI steve@ciesinski.comare solutions that are blurring the line DICK COSTOLObetween what’s the desktop, what’s Pandora, a recently launched Web 2.0 dickc@feedburner.comthe ‘Net and what’s in-between,” he company, which owns a proprietary BRAD FELDsays. “As networks become faster database of music categorized brad@feld.comand technologies develop that are by professional musicians, used BILL GURLEY bgurley@benchmark.comable to push things on the edge OpenLaszlo to quickly build its zero- J.B. HOLSTONeven with intermittent or nonexistent install music discovery service. jbh@newsgator.comconnections, it makes the rich client/ Pandora CTO, Tom Conrad, tips his hat CHARLES HUDSONthin client debate irrelevant.” to OpenLaszlo saying: “We considered charles@charleshudson.net everything you can imagine: plain old TIM O’BRIEN tim.obrien@microsoft.comOpen source and Web 2.0 HTML, AJAX, Flex… In the end, Laszlo DEAN PETRACCA was the clear winner on all fronts— dean.petracca@us.pwc.comNo discussion of Web 2.0’s community- mature, reliable, and the perfect tool SCOTT RAFERoriented character should end without for the job. The outcome was only rafer@rafer.nettouching on open source innovations. remarkable in that the decision was CHRIS SACCA csacca@gmail.com made by some of the most capable DAVID SIFRYIn 2000 Laszlo Systems started up AJAX developers on the planet.” dsifry@technorati.comas a pioneer of next-generation Web ANDREAS STAVROPOULOUSapplication user interface technology, “Overall,” concludes Petracca, “I think andreas@dfj.comsold as proprietary server software. we’re seeing a more stable, positive DANNY WALLACE danny.wallace@us.pwc.com“In 2004, as the next generation business environment in which youngof the Web approached rapidly, it companies have more latitude tobecame clear that the best way for us develop the fundamentals without theto maintain our market leadership in same degree of pressure to createcompetition with much larger entrants incredible shareholder value overnight.”was to go open source, harnessingthe talent and enthusiasm of a global “Everything’s cyclical, right?” Gurleycommunity of developers,” says laughs. “The time to do killer InternetCEO Steve Ciesinski, who joined the investing was when no one wanted to.”company in March of that year. Sincethe company went open source withOpenLaszlo in October 2004, it hashad over 120,000 downloads of itsWeb 2.0 building blocks technology.Laszlo has adopted its own platformto build Laszlo mail, a rich Web mailand contact application, the latter acenterpiece of the vision the companyhas around an integrated “digital life”communications suite. “Every timeyou click you won’t get a new page, www.pwcnextwave.com 19
  • 23. Issues regarding cheapQ4 2005 Regulatory buzz stock and IPOs for private companies Nonpublic companies are continually challenged to requirements of FAS 123(R). The offering price at determine the fair value of their enterprises. Some the time of the IPO is $10 higher than the option’s nonpublic companies have the benefit of arm’s exercise price on the grant date. If in the six-month length cash transactions with third parties, which period preceding the IPO there was no discrete provide evidence of fair value. Many nonpublic event that increased the fair value of the underlying companies, however, have not consummated such stock, the SEC will presume that the option was a transactions and thus do not have such evidence cheap-stock grant. This means that, in effect, the of fair value. This becomes particularly important company issued an in-the-money stock option, when a nonpublic company plans to go public. Many with the underlying stock’s fair value exceeding the issues may surface when a company fails to correctly option’s exercise price on the grant date. In this case, determine the fair value of its equity securities that the company would have to rerun its option-pricing can lead to SEC staff inquiries about the company’s model and record a “cheap stock” charge to reflect issuance of “cheap stock” during the IPO process. the fact that the option was issued in-the-money and Cheap stock refers to common stock issued at a therefore has a larger fair value than the same option price below the IPO price and equity awards (e.g., granted at-the-money. stock options) issued with an exercise price below the IPO price, both within one year prior to the filing Although the AICPA’s practice aid has no of the initial registration statement. authoritative status, the SEC staff expects companies in the IPO process to make the disclosures that the In June 2004, the AICPA issued a practice aid practice aid recommends for periods preceding the entitled Valuation of Privately-Held-Company Equity IPO. The practice aid also specifies enterprise- and Securities Issued as Compensation. The practice aid industry-specific attributes that should be factored provides financial-statement preparers, valuation into a determination of fair value (e.g., the fair value of specialists, and auditors (internal and external) with stock-based-compensation awards that a company best practice guidance for valuing privately-held- grants to employees), and describes important company equity securities, including stock-based- steps that a company should take when obtaining or compensation awards that are within the scope of performing a valuation. FAS 123(R). Under FAS 123(R) the issuance of cheap stock may cause greater changes in compensation cost than under APB 25. For example, a nonpublic company may grant a typical-fixed, at-the-money stock option six months before its IPO under the accounting 20 Issue 4: 2005
  • 24. How PricewaterhouseCoopers can helpPwC is helping numerous assumptions under those tax implications, or any of Resource Centre at ourcompanies assess the models, and deal with a host the complex issues related to VisionToReality site atimpact of FAS 123(R). This of other implementation this topic, or if you would like www.pwcV2R.comexperience places us at the decisions. PwC can also help in assessing the impact and click on “Find Aforefront of understanding help companies consider that the accounting rule has Professional.”the complex issues that are potential changes in their on your company, contactinvolved in implementing compensation programs. your PwC engagementthis accounting standard, partner. If your companymaking us better prepared If you have questions on currently does not receiveto help companies choose accounting for stock-based- services from us, pleaseamong the various compensation programs, call our Technology Industryvaluation models that valuation techniques, FASB Hotline at 1.877.PwC.TICEare now available, select developments, plan design, or visit our EntrepreneurThis information was excerpted from PwC’s monograph, FAS 123(R), “Share-Based Payment”—A multidisciplinaryapproach, 2nd Edition. To obtain an electronic copy of the full version of this publication, please visit our CFODirect Web site (www.cfodirect.com) and click on the “DataLine 2006:02” link on the homepage. www.pwcnextwave.com 21
  • 25. Successfully shaping the future:MoneyTree™ FutureCentricSMcompanies 2005“Innovation, disruption, improving which is a representative sample of talking, and moving as if they werethe way we live—those are the entrepreneurial companies building actually in the hospital room. RP-7 isqualities that make a product ideas that are shaping the future. deployed in over 40 hospitals aroundinteresting to a venture capitalist,” the US and Europe and has beensays Tracy T. Lefteroff, Global Some of the macro trends driving featured on the hit television show “ER”.Managing Partner of Private Equity VC investing during 2005 were the& Venture Capital Industry Services continued intersection of IT and life Alexander “Sandy” Spiro, Jr., seniorat PricewaterhouseCoopers. “Add sciences, consumer adoption of managing director at VC firm Beringea,to that a strong management team technology, and the focus on national was intrigued by the InTouch product and personal security solutions. due to its remote presence capabilities.with the ability to execute and “The RP-7 robot has tremendousyou’ve got the ‘perfect storm’ for The intersection of technology and life application, particularly in acute care.investment dollars.” sciences continues to offer great strides The product brings the critical expert in healthcare. One innovation affecting knowledge to bear when and whereToday’s VCs are investing in healthcare delivery is InTouch Health’s that expert knowledge is needed. Thebreakthrough ideas and products “Robot Doctors”. The robot—called doctor is not physically there—but isthat will change the way we work, RP-7 (for Remote Presence 7)—uses actually there.”play, and even stay healthy. That telecommunications and mobile roboticphilosophy is reflected in the 2005 technology to allow physicians to In the IT world, Motion Computing’sMoneyTree™ FutureCentricSM list remotely visit patients—hearing, seeing, Tablet PCs are already changing theof venture-backed companies, www.pwcnextwave.com 23
  • 26. Fast-growth CEOs takeQ4 2005 Industry currents brighter outlook, but proceed with caution According to PricewaterhouseCoopers’ Trendsetter somewhat diminished concern about market demand, Barometer, CEOs of the nation’s fastest-growing energy prices, interest rates, and profitability. But private companies are rebounding from effects of despite their more upbeat perspective, they are the third quarter’s disastrous hurricanes, business proceeding with caution. Going forward, they have interruptions, and shocking energy prices. They are shaved their revenue growth target and have scaled now taking a more optimistic view of the business back their investment and hiring plans. climate for the next 12 months, coupled with Quick Comparison 3Q 05 4Q 05 Optimistic about US economy 62% 71% Optimistic about world economy 54% 68% Expected US economy growth 3.1% 3.3% Expected industry sector growth 7.6% 8.1% Company revenue growth target 23.6% 22.2% Potential barriers Weak market demand 57% 50% Energy prices 41% 33% Higher interest rates 32% 27% Decreasing profitability 30% 24% Planning major new investments 49% 46% Rate of new investments 13.9% 12.6% Expecting new hiring 79% 80% Rate of new hiring 11.2% 9.0% Source: PricewaterhouseCoopers’ Trendsetter Barometer interviewed CEOs of 339 privately-held product and service companies identified in the media as the fastest growing US businesses over the last five years. Surveyed companies range from approximately $5-150 million in revenues. Interviewing for 4Q 05 was completed January 24, 2006. For more information on this report, visit www.barometersurveys.com. 24 Issue 4: 2005
  • 27. way professionals such as healthcare or be called from the unit, effectivelyworkers, real estate agents, and providing parental controls for cellinsurance adjusters work. These go- phone use.anywhere computers, designed toreplace clipboards, allow users to enter Security products continue to receiveinformation via handwriting or speech- serious investment dollars—fromrecognition software. For example, companies focused on nationalHealthSouth has deployed the Tablet security to companies focused onPCs to physical therapists in its personal password security. Anrehabilitation facilities and, as a result, example: Reveal Imaging provideshas seen a significant improvement in very small bomb screening devices inpatient and clinician satisfaction as well airports that improve work flow andas productivity. passenger experience—and make air travel safer.For the “regular guy” or“tween”—adopting technology On a more personal level, by year- end 2006, it is likely that all financialThe FutureCentric list also features institutions will be required to provideproducts that top everyone’s wish second level authentication—meaninglist—such as a product which delivers something else besides the passwordthe “digital home of the future” and a when signing into financial accounts.must-have cell phone for “tweens.” BioPassword has developed a patented technology that providesDedicated Device’s digital home personal password security throughproduct is a networking and media second-level Internet authentication.server, delivering networked accessto videos and digital entertainment, According to Gerard H. Langeler, ofphotos and music throughout the OVP Venture Partners, “Essentiallyhome. Today’s tech-savvy homeowner almost every other mechanism foris embracing the idea of a fully second-level authentication requireswired—or wireless—home where all additional hardware. BioPassword is adigital media and entertainment can be great, proven technology that providesshared throughout the house. second-level authentication based on your keystroke patterns. And, there’sJeff Moeser, co-founder and executive really no way to duplicate someone’svice president of Dedicated Devices, keystroke patterns—they’re too subtle.”sees the product as extending theuse of digital media in people’s lives. Breakthrough ideas and killer“Homebuyers today have grown up management teamswith computers, iPods, and digitalcameras and they want to make the These are just a few examples of themost of their digital investments. With new technologies and products onour product, customers have access the horizon—all made possible byto all their pictures, music, and video— venture capital dollars. The commonanywhere in their house.” element among these companies is breakthrough ideas that bring changeNot only are today’s homeowners a and widespread impact to industriesfocus, the VC community didn’t ignore and consumer experiences. Settingthose consumers of tomorrow—the aside the great ideas, what else about“tween” segment. Kids between the these companies gets the attentionages of eight and twelve, begging their of VCs and makes them attractiveparents for their own cell phone, can investments? Overwhelmingly, thenow have one especially designed answer is killer management teams.for them by Firefly Mobile. Parentsprogram these brightly colored phones According to VCs and some of theso that only certain numbers can call companies on the FutureCentric list, www.pwcnextwave.com 25
  • 28. Voice of the VCQ4 2005“Our companies are our babies… they’re beautiful; they’re smart.”“The exit is harder than the investment decision.”“A lot of our best investments involve small amounts of money.”“I like the times between board meetings. That’s when the real work gets done.”“The thing we’re bad at being able to predict is human performance.”“A board that has different viewpoints is a stronger board.”“The whole purpose of early-stage investing is to help create category-defining companies.”“I don’t see a lot of white-space opportunities.” Robbie Gimblett Assurance and Business Advisory Services Partner26 Issue 4: 2005 photographer: John Crawford
  • 29. killer management teams can be According to Moeser, what excitedcomprised of executives with technical investors about Dedicated Devicescredibility in their field of expertise was not only their ideas and the marketor can be serial entrepreneurs. Is potential but also the “killer team withseasoned business experience more a track record of ideation, settingcritical in a team than entrepreneurial standards, winning awards, and gettingexperience? The consensus was that products to market very efficiently.”while both are important, the mostcritical factor is the ability to execute Advancing the way we live, work,on an idea. and play, this year’s FutureCentric list is comprised of companies withIn the case of InTouch Health, the killer teams and breakthrough ideas.executive team was instrumental in As Lefteroff observed, “The entiredeveloping one of the first surgical process of venture capital fundingrobots to do micro-surgery; a ensures new ideas and technologiestechnique that is being very widely get to market and meaningfullyused around the world today. Clearly change people’s lives.”the team had the expertise in bringinga robotic solution to the healthcare To view the entire list of FutureCentricfield. According to Spiro, “The companies, visit the MoneyTree Webindividuals on the management team site at www.pwcmoneytree.com.have been together for a long periodof time, have been very successful inother ventures, and are still together. nextwave feature contributor Julie Pusey isThey’re good, solid producers with an independent writer who focuses on the technology, telecommunications, and lifegood direction and focus.” sciences sectors. She can be reached at j_pusey@msn.com.The technological competence ofthe BioPassword team was what Directoryintrigued Gerald Langeler at OVP. “The JEFFREY BUSSGANG jbussgang@idgventures.comBioPassword team brought a lot of GERARD H. LANGELERtechnical credibility to the table. They langeler@ovp.comdidn’t have the start-up experience that TRACY T. LEFTEROFFsome of our companies have, but they tracy.t.lefteroff@us.pwc.comdo have a lot of technical credibility JEFFREY K. MOESER jeff@dedicateddev.comand experience producing products ALEXANDER “SANDY” SPIRO, JR.like this.” sspiro@beringea.comJeff Bussgang, of IDG Ventures,concurs with the idea that technicalcredibility is a requirement for agreat management team. “TheReveal Imaging team was a group ofexecutives from the two leading bombdetection companies. Only a handfulof people in the world know how tobuild these devices and this team hadpreviously built four of the six devicesthat had been approved by the TSA. Weknew this was the absolute dream teamfor bomb detection.”Jeff Moeser and his team atDedicated Devices possessedtechnical credibility and had a trackrecord of entrepreneurial success. www.pwcnextwave.com 27
  • 30. Business Advisors VISIONTO R EALITY Private Equity GroupPricewaterhouseCoopers’ Whether your company is an emerging business A Programme Serving Companies with Extraordinary Potential seeking venture capital, or an established company PricewaterhouseCoopers helps seeking to expand through a merger, acquisition, growth companies unlock joint venture, or strategic alliance, you can rely on extraordinary potential PricewaterhouseCoopers for a full range of support by turning vision into reality. services. PricewaterhouseCoopers’ global presence, extensive knowledge of capital markets, and network of financing relationships provides access and introductions to many sources of funds—both domestic and international. Since PricewaterhouseCoopers is the first choice About PricewaterhouseCoopers for accounting services among the nation’s top The member firms of the PricewaterhouseCoopers 100 technology-based venture capital firms, we are network (www.pwc.com) provide industry-focused knowledgeable about the issues that arise between assurance, tax, and advisory services to build public entrepreneurs and venture capitalists. We excel at: trust and enhance value for its clients and their – Assisting you in identifying financing sources stakeholders. More than 130,000 people in 148 – Serving as your advisor as you prepare for an countries across our network work collaboratively IPO or position yourself to be acquired using Connected Thinking to develop fresh – Providing due diligence and valuation services perspectives and practical advice. for acquisitions “PricewaterhouseCoopers” refers to the network If you’d like to contact the nearest of member firms of PricewaterhouseCoopers PricewaterhouseCoopers’ venture capital expert, International Limited, each of which is a separate please call our Technology Industry Hotline at 1.877. and independent legal entity. PwC.TICE or visit our Entrepreneur Resource Centre at our VisionToReality site at www.pwcV2R.com and ©2006 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of click on “Find A Professional.” which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US). BS.BS.06-0443.02/06.LMT www.pwc.com/technology www.pwcnextwave.com WHPHTMON0306If you’d like to contact thenearest PricewaterhouseCoopers’venture capital expert, pleasecall our Technology IndustryHotline at 1.877.PwC.TICE or visitour Entrepreneur Resource Centreat our VisionToReality site:www.pwcV2R.com and clickon “Consult A Professional.”