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  1. 1. Denver Software Club The State of the Venture Capital May 13, 2004
  2. 2. <ul><li>What is going on in venture capital today? </li></ul><ul><li>What does this mean for software in Colorado? </li></ul><ul><li>Researching VC firms for your fundraising efforts </li></ul>THE STATE OF VENTURE CAPITAL Agenda
  3. 3. Indicators of the venture capital industry’s “health” are improving THE STATE OF VENTURE CAPITAL The “Good” News <ul><li>IT spending has stabilized and most analysts forecast significant growth for 2004 </li></ul><ul><li>Technology bellwethers such as Cisco, Dell, EMC, etc. are posting solid revenue growth and profit – crediting an improving sales / customer environment </li></ul><ul><li>Cost of capital remains low. Companies have the ability to finance their operations inexpensively </li></ul><ul><li>Strong management talent continues to be available </li></ul>
  4. 4. For the first time since 2000, VC fundraising increased year over year. More importantly, VentureOne estimates that nearly $70-$80 billion of this capital is currently available for investment THE STATE OF VENTURE CAPITAL The “Good” News $ Billions Venture Capital Funds Raised Source: NVCA / Thomson Venture Economics, VentureOne
  5. 5. After three years of declining venture capital deployment, the industry is on pace to deploy more capital this year than it did in 2003 THE STATE OF VENTURE CAPITAL The “Good” News $ Billions Venture Capital Funds Deployed Source: NVCA / Thomson Venture Economics Note: Q1 investment annualized to provide full year
  6. 6. Mergers and acquisition (M&A) activity involving venture-backed companies has picked up significantly THE STATE OF VENTURE CAPITAL The “Good” News $ Millions Average M&A deal size Source: NVCA / Thomson Venture Economics <ul><li>Deal size has increased significantly over the past two years </li></ul><ul><li>Acquirers have seen a marked increase in the value of their acquisition currency and, as such, have been more willing to make “real” acquisitions </li></ul>
  7. 7. Initial public offerings of venture-backed companies have increased rapidly THE STATE OF VENTURE CAPITAL The “Good” News # of IPOs Venture-Backed IPOs Source: NVCA / Thomson Venture Economics <ul><li>Gains in the public markets have generated greater receptivity to venture-backed IPOs </li></ul><ul><li>Six of the 13 VC IPOs in Q1 2004 were biotech companies </li></ul><ul><li>Over 50 venture-backed companies are currently in registration </li></ul>
  8. 8. Software continues to be one of the largest venture capital investment sectors THE STATE OF VENTURE CAPITAL The “Good” News Source: NVCA / Thomson Venture Economics Software Share of Venture Capital Investment
  9. 9. While it is clearly too early to declare a “full” recovery, the venture capital community has seen improving fundamentals over the past couple of years THE STATE OF VENTURE CAPITAL The “Good” News <ul><li>Macro-trends are positive (IT spending, interest rates, etc.) </li></ul><ul><li>Venture capital fundraising and deployment have stabilized and appear poised for increased years </li></ul><ul><li>Public market advances have created legitimate liquidity options for venture-backed companies – M&A as well as IPOs </li></ul><ul><li>Qualitatively, industry participants tend to agree that the environment is improving - optimism has returned </li></ul><ul><li>Software continues to garner a material share of venture capital investment </li></ul>
  10. 10. Unfortunately, Colorado has not yet seen a resurgence in venture capital funds deployed THE STATE OF VENTURE CAPITAL The “Not-So-Good” News $ Millions Venture Capital Funds Deployed Source: PricewaterhouseCoopers / NVCA / Thomson Venture Economics Note: Q2 ’03 includes $156 million to WildBlue Communications <ul><li>Colorado has historically been led by significant VC investment in communications services – only two of these deals have raised VC in the past year </li></ul><ul><li>Two of the 15 investments in Q1 2004 were seed / early-stage companies </li></ul><ul><li>Remove Cornice’s $51 million raise and Q1 2004 investment in Colorado was $33 million </li></ul>
  11. 11. In the first quarter of 2004, Colorado failed to make the top 10 states for venture capital activity Source: PWC / NVCA / Venture Economics MoneyTree Survey THE STATE OF VENTURE CAPITAL The “Not-So-Good” News $209 26 Washington $97 17 Virginia $113 21 Maryland $132 11 Illinois $197 24 Georgia $200 15 New Jersey $201 19 Pennsylvania Total Venture Capital Invested ($ millions) # of Companies Funded State $217 34 Texas $687 74 Massachusetts $1,828 240 California
  12. 12. While the national venture capital market appears to be in the midst of a recovery, Colorado is lagging THE STATE OF VENTURE CAPITAL The “Not-So-Good” News <ul><li>Venture capital investment in Colorado has not yet shown signs of stabilization or growth </li></ul><ul><li>A small number of seed / early stage companies are receiving venture capital in Colorado. Later-stage companies garnering the vast majority of investment </li></ul><ul><li>Colorado’s historic area of strength, communications services, continues to be in the midst of a shakeout – very few upstart carriers, CLECs, etc. have successfully raised capital in the past couple of years </li></ul><ul><li>While M&A on the national-level has picked up significantly, the only Colorado deal of note is the PeopleSoft / J.D. Edwards transaction </li></ul>
  13. 13. Although the environment is still in flux, software will continue to be a core industry sector in Colorado THE STATE OF VENTURE CAPITAL What Does this Mean for Software in Colorado? <ul><li>The nascent nationwide recovery should begin to deliver benefit to Colorado </li></ul><ul><li>A substantial amount of venture capital, ~$70 billion, will likely be invested in the next few years </li></ul><ul><li>Colorado continues to provide software companies with a strong base of highly-educated, entrepreneurial talent </li></ul><ul><li>Whereas raising $10 million of capital in 1999 was merely table-stakes, a company that successfully raises $3-$5 million today can make material progress </li></ul><ul><li>Early stage software companies will find it challenging to raise capital in Colorado – effectively targeting capital sources will be key </li></ul>
  14. 14. THE STATE OF VENTURE CAPITAL Researching VC Firms Keys to successful VC funding <ul><li>Think critically – are you (is your company) ready for venture capital? </li></ul><ul><li>Understand the process and prepare accordingly </li></ul><ul><li>Give yourself sufficient time </li></ul><ul><ul><li>at least 4-6 months to complete a professional VC round </li></ul></ul><ul><li>Attract and engage the right advisors early (and listen to them) </li></ul><ul><li>Create a business plan which describes a business, not an invention </li></ul><ul><li>Invest your time wisely – research and target the right VCs </li></ul><ul><li>Get referrals into the venture firms </li></ul>
  15. 15. THE STATE OF VENTURE CAPITAL Researching VC Firms Creating the appropriate target list of venture firms requires a significant amount of upfront work Broad Lit Search, Pratt’s Guide, PWC MoneyTree Report, VentureXpert, Securities Data Corp., VentureOne, NVCA, State Venture Associations (CVCA) Broad Search Target Referral Refined Search Advisors Targeted Lit Search, VC’s Web Page Law Firms, Acct Firms, Portfolio Companies’ CEOs, Advisory Board Members
  16. 16. THE STATE OF VENTURE CAPITAL Researching VC Firms Screening criteria <ul><li>Do they invest in your industry </li></ul><ul><ul><li>Stated industry focus, evidence in existing / prior portfolio </li></ul></ul><ul><ul><li>Do they understand your specific business sector </li></ul></ul><ul><ul><li>Caveat: Would they have a conflict with an existing investment </li></ul></ul><ul><li>Do they invest in your region </li></ul><ul><li>Do the invest in your stage of company </li></ul><ul><ul><li>Are the seed, development, expansion, late-state investors </li></ul></ul><ul><li>How much do they prefer to invest </li></ul><ul><ul><li>Generally not more than 10% of fund size, nor less than 2% </li></ul></ul><ul><li>Will they lead, will they follow </li></ul><ul><li>What else do they bring to the table </li></ul><ul><ul><li>Contacts, management recruiting, board attention, prior relationship, customers, etc. </li></ul></ul><ul><li>Chemistry </li></ul>
  17. 17. THE STATE OF VENTURE CAPITAL Researching VC Firms Once you have the right list of targets, get a referral <ul><li>Best “signal to noise” ratio </li></ul><ul><ul><li>Portfolio company CEOs / executives </li></ul></ul><ul><ul><li>Successful entrepreneurs </li></ul></ul><ul><ul><li>Investors in the VC’s fund </li></ul></ul><ul><ul><li>Other VC firms </li></ul></ul><ul><ul><li>Top law firms </li></ul></ul><ul><ul><li>Top accounting firms </li></ul></ul><ul><ul><li>Investment banker with an existing relationship </li></ul></ul><ul><li>Less “signal”, more “noise” </li></ul><ul><ul><li>Consultants </li></ul></ul><ul><ul><li>Accountants, attorneys, bankers that do not have existing relationships </li></ul></ul><ul><ul><li>Business brokers, “finders”, etc. </li></ul></ul>