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0302-0398309-WoolschlagerVC6303.ppt

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0302-0398309-WoolschlagerVC6303.ppt

  1. 1. Today’s Venture Capital Environment Ted R. Woolschlager Director, Emerging Growth Markets Mid-Atlantic Area Ernst & Young June 7, 2003
  2. 2. Tech Investing: The Good News & The Bad News
  3. 3. Venture Capital Today: <ul><li>… The bad news: </li></ul><ul><li>Public markets shut tight </li></ul><ul><li>Less money being raised </li></ul><ul><li>Funds being closed </li></ul><ul><ul><li>… A challenging environment </li></ul></ul>
  4. 4. Extremely Difficult Exit Environment <ul><li>Nasdaq Down 39% 2000; 21% 2001, 33% 2002 </li></ul><ul><li>2002: 19 Venture-Backed IPOs Raising $2.2BN </li></ul><ul><li>2001: 41 Venture-Backed IPOs Raising $3.5BN </li></ul><ul><li>2000: 261 Venture-Backed IPOs Raising $27.7BN </li></ul><ul><li>M&A Deal Environment Quiet </li></ul>
  5. 5. The Hangover Effect: The Math Is Ugly <ul><li>From 1995-2000: </li></ul>14,463 978 1,529 1,180 10,776 Companies funded Went public Were acquired Went out of business Remaining Source: Venture Economics; Venture Source - - -
  6. 6. …The Good News <ul><li>Less money chasing deals </li></ul><ul><li>Bigger, more mature companies being financed </li></ul><ul><li>Attractive valuations and terms </li></ul><ul><li>Exit infrastructure larger since last cycle </li></ul><ul><li>Hot markets continue to be PNW, MAA, NE and NY </li></ul><ul><li>… High returns possible at market bottoms </li></ul>
  7. 7. Funds Raised by Venture Capital Firms Q2:00 to Q2:02 $ mil Source: PricewaterhouseCoopers / Venture Economics / National Venture Capital Association / Money Tree <ul><li>Less competition for new deals </li></ul>
  8. 8. Slower Investing Pace VC Equity Into Venture Backed Companies Amount Invested ($B) Number of Deals *Note: 9/30/02 Figures Annualized
  9. 9. “First Sequence” Financings: Q1 1995 – 2002 YTD Amount Invested ($B) Number of Deals
  10. 10. Median Valuations of Venture Rounds Q1:00 to Q2:02 Median Pre money Valuation ($ mil) Source: VentureOne <ul><li>Valuations down 61.4% in 8 quarters </li></ul><ul><ul><li>“ Venture valuations Go Back to Levels of Mid-1990s” </li></ul></ul><ul><ul><li>-The Wall St. Journal, August 28, 2002 </li></ul></ul>
  11. 11. Attractive Valuations <ul><li>Change </li></ul><ul><li>43% </li></ul><ul><li>46% </li></ul><ul><li>69% </li></ul><ul><li>76% </li></ul>Q2:02 $3.00 $7.00 $12.00 $24.00 Q1:00 $5.30 $13.00 $39.00 $100.00 Round Seed First Second Later Median Valuations of Venture-backed Companies Q1:00 vs. Q2:02 $ in millions
  12. 12. Better Terms for Investors… Better Times for Investors <ul><li>Liquidation Preference </li></ul><ul><li>Mandatory Redemption </li></ul><ul><li>Milestones </li></ul><ul><li>Drag-along rights </li></ul><ul><li>More mature companies </li></ul><ul><li>Greater ability to recruit talent </li></ul>
  13. 13. Venture Capital Has Always Been a Cyclical Business <ul><li>Late 80’s / Early 90’s: </li></ul><ul><li># VC Funds 1985: 850 </li></ul><ul><li># VC Funds 1991: 450 </li></ul><ul><li># IPOs 1986: 377 </li></ul><ul><li># IPOs 1989: 63 </li></ul><ul><li># Co’s Backed 1987: 523 </li></ul><ul><li># Co’s Backed 1991: 237 </li></ul><ul><li>… AND YET: </li></ul><ul><li>Cisco: 1st VC Funding: 1987 IPO: 1990 </li></ul><ul><li>AOL: 1st VC Funding: 1986 IPO: 1992 </li></ul><ul><li>UUNet: 1st VC Funding: 1990 IPO: 1995 Sale: 1996 </li></ul><ul><li>Mid 70’s: </li></ul><ul><li>$ Committed to VC 1974: $ 380 mil </li></ul><ul><li>$ Committed to VC 1977: $ 62 mil </li></ul><ul><li># IPOs 1972: 75 </li></ul><ul><li># IPOs 1975: 2 </li></ul><ul><li>… AND YET: </li></ul><ul><li>Apple: 1st VC Funding: 1977 IPO: 1980 </li></ul><ul><li>MSFT: 1st VC Funding: 1976 IPO: 1986 </li></ul><ul><li>Symbol: 1st VC Funding: 1975 IPO: 1979 </li></ul>
  14. 14. Huge Growth of Venture-Backed Companies -- Through Every Cycle <ul><li>Significant economic impact: </li></ul><ul><li>12.5 mil direct jobs </li></ul><ul><li>27 mil direct and indirect jobs </li></ul><ul><li>$ 1.1 tril in GDP </li></ul><ul><li>11% of US GDP </li></ul><ul><li>$ 157 bil in R&D investment </li></ul><ul><li>Huge leverage to capital invested </li></ul>Source: DRI-WEFA Study; NVCA
  15. 15. Venture Has Outperformed Other Asset Classes in the Medium and Long Run Source: NVCA / Venture Economics 10.2 8.3 (5.2) (22.2) (33.8) Nasdaq 10.6 7.8 (1.1) (12.2) (22.2) S&P 11.8 9.7 1.2 (8.0) (15.9) Dow 14.2 10.7 4.9 (0.1) (9.6) All Buyouts 17.3 25.9 34.9 41.1 (23.8) All Venture 20 Yr 10 Yr 5 Yr 3 Yr 1 Yr Fund Type Returns (%)
  16. 16. A Success Story- Blackboard <ul><li>Blackboard Inc. </li></ul><ul><li>Software- eLearning </li></ul><ul><li>Raised over $100 million </li></ul><ul><li>Both VC and strategic investments </li></ul><ul><li>Survived the “bubble” </li></ul><ul><li>Revenue of approx. $70 million, cash flow positive </li></ul>
  17. 17. Focus on Biotechnology # !@
  18. 18. Global Biotech at a glance Key metrics Revenue ($m) R&D expense ($m) Net loss ($m) Number of employees $34,874 $16,427 $(5,933) 188,703 Number of companies Public companies Private companies Total 622 3,662 4,284
  19. 19. Biotechnology is a global industry . . . 85 / 416 Canada 342 / 1,457 U.S. 104 / 1,879 Europe 91 / 532 Asia/Pacific Distribution of public/total biotechnology companies driving the emergence of centers of excellence. # !@
  20. 20. . . . and is concentrated in the U.S. and Europe Countries we covered 79% Others 21% Global GDP Share of global biotechnology revenues (Public companies) U.S. 72% Europe 22% Canada 3% Asia/Pacific 3% # !@
  21. 21. Major findings Europe U.S. Canada Asia/Pacific Record-Level Venture Fundings and Drug Approvals Rapid Growth 2 nd Largest Concentration of Biotech Companies 12 th Consecutive Year Of Revenue Increase Emerging Biotech Player # !@
  22. 22. Partnering Across Borders Canada U.S. Europe Asia/Pacific Mature market Short term earnings boost Pharma seeking new technology Biotech seeking global development and capital Source: Ernst and Young Beyond Borders Report 2002 # !@
  23. 23. Conclusions <ul><li>Technology Is Not Dead, “It’s Just Resting” – Still the Source of Major Productivity Gains </li></ul><ul><li>Absolute Returns Will (of course) Be Lower But Deals Must Be Priced to Outperform </li></ul><ul><li>Longer Exit Horizon Puts Focus on Business Partnership </li></ul><ul><li>Emphasis on Who Can Help Build Companies </li></ul>
  24. 24. Conclusions: <ul><li>Now is a good time to invest -- valuations are low, terms are good (for the buyer) </li></ul><ul><li>The pace of innovation continues -- growth will return, and historically the most money has been made investing at cyclical bottoms </li></ul><ul><li>Private equity is institutionalizing – a handful of brands will emerge; standards will be the norm </li></ul>
  25. 25. Thank You

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