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Venture Capital Update


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Venture Capital Update

  1. 1. Venture Capital Update At SVB Financial Group, understanding the industries we serve is fundamental. Like you, we track, study and analyze the activity in our markets and, as your partner, we want to share our findings. This report chronicles recent venture capital activity and includes commentary from our vantage point in the industry regarding what it all means. We seek out and consolidate the most compelling data, pointing to the trends in the technology and life science industries. We invite your opinions and encourage ongoing dialogue regarding the opportunities ahead of us. U.S. Venture Capital Investing Activity U.S. Venture Capital Investing Activity ($B) ($B) by Quarter by Year Source: VentureOne and Ernst & Young Quarterly Venture Capital Report Source: VentureOne and Ernst & Young Quarterly Venture Capital Report When in Bangalore… Success in Global VC Investing By Mark MacLennan, president, SVB Capital; and Suresh Shanmugham, senior vice president, SVB Global Although the center of the technology world continues to be the United States (and, more specifically, Silicon Valley), the venture capital community is actively looking outside the borders of the U.S. to seek investment opportunities that will deliver the high returns their limited partners expect. In this new world of global venture investing, limited partners have to believe in the promise of attractive returns rather than rely on years of successful performance. The “how” and “when” of turning the promise into reality are questions the venture capital and limited partner communities face today. In September, Silicon Valley Bank hosted its inaugural Global Venture Capital Summit in Bangalore, India. The event brought together forty top-tier investors from the U.S., Europe, Israel, Asia and India for three days of thought-provoking discussion about the impact of globalization on venture capital and private equity investing. Topics ranged from the development of the telecommunications markets in India and China, to technological innovation in Israel and globalization of the film industry. Many of the attendees were making their first trips to India and were in the early stages of plotting their firms’ strategies for global markets. This event provided an excellent forum where peers could share their thoughts and experiences on expanding their investment outlook and forging relationships to further their global aspirations. Attendees’ shared experiences seemed to indicate that one of the most important requirements for investing in emerging entrepreneurial environments is the ability to learn and adapt as you go. (continued) SVB Capital 1 December 2005
  2. 2. U.S. Venture-Backed IPOs Three findings emerged from the Summit as important Deals & Dollars considerations for GPs and LPs in evaluating investment ($M) outside of the United States: 1. Success in global markets requires an on-the-ground presence or, at a minimum, special access to high quality local co-investors. 2. There is no cookie-cutter approach to investing outside of the United States. Each geographic market requires its own independent and differentiated strategy. 3. Successful global venture investments do not necessarily fit the profile (industry and stage) of venture investments in the United States. Success On-The-Ground Source: VentureOne and Ernst & Young Quarterly Venture Capital Report A number of venture firms have adopted a fly-in approach to working in markets such as Israel, India and China. This is a measured way to explore these countries from an invest- Regional Focus ment standpoint and learn the nuances of the local entrepre- All Industries - 3Q05 neurial environment by making frequent visits and performing due diligence before committing capital and additional firm resources. But in order to be seen as credible players in the local market, after a period of time VCs need to commit in a more significant way. Local entrepreneurs, service providers, and co-investors will need to choose who they work with over time and are more likely to develop deep relationships with those firms that have committed people, capital, and resources and demonstrate that global investing is a strategic mandate for their firms. NEA and Sequoia are among the growing number of venture firms that have recognized this need. Sequoia established a China operation this year, and NEA, which has invested more than $100 million in China in the last three years, is in the process of opening its China Source: VentureOne and Ernst & Young office. While in-market, dedicated resources are the ideal, not every Post Money Valuation Report ($M) - 3Q05 firm chooses to go this route. For some firms, a hybrid approach of tight relationships with top-tier local investor partners and fly-in presence are essential to their ability to see and invest in the most attractive opportunities. The Mayfield Fund has employed this strategy in its relationship with GSR Ventures in Beijing, and NEA is helping China- based venture firm Northern Light raise its first $100 million in exchange for local deal flow, which will complement NEA’s own on-the-ground efforts. The challenge of the hybrid approach is that the number of firms in these local markets that fit the criteria of “co-investors of choice” is very limited and being able to align with them early on is essential. Source: VentureOne (continued) SVB Capital 2 December 2005
  3. 3. Most Active Investors - 3Q05 Different Approaches for Different Markets The enormous opportunity in different global markets has caused a number of VC firms to look at expanding into several markets at the same time with a single team. While there are clear benefits to focusing a small team on targeting multiple regions, such as consistency across markets, each market requires a different strategy –– one that reflects its cultural, legal and regulatory environment, as well as its maturity. This approach requires deep, market-specific * Corporate VC knowledge; focused technical and business expertise; Source: VentureOne and Ernst & Young Quarterly Venture Capital Report connections to the right people locally; and experience navigating the requirements particular to each market. U.S. VC-Backed Liquidity Events by Industry Over the past five years, India has liberalized its regulations for foreign direct investors, but there remain structural complexities that need to be navigated. For this reason, non-native investors typically set up off-shore holding companies in Mauritius or the Cayman Islands to enable them to invest in and divest from startup companies more easily. The same is true in China, and the off-shore compo- nent adds significant complexity to the process of investing in these countries. Source: VentureOne and Ernst & Young Quarterly Venture Capital Report Time is another consideration for VCs trying to expand into several markets at once. Long distances and multiple time U.S. IPOs vs. M&As zones can inhibit a VC’s ability to offer the kind of intimate support and oversight commonly received by U.S. startups to equally needy companies on the other side of the globe. For these reasons, dedicated teams with country-specific mandates are a much more effective approach to managing international expansion. The Changing Deal Source: VentureOne and Ernst & Young Quarterly Venture Capital Report With the success they’ve had in the United States, it might be tempting for GPs to take their Silicon Valley mindset on Price Change what constitutes an attractive venture capital deal and The direction of price changes for 100 SF Bay Area companies receiving directly transpose it to the global arena. Given the nascent financing in 3Q05, compared to their previous round. stage of the traditional target industries for VC investment in certain major global markets, that approach can seriously limit the scope of investible deals for interested investors. Many of the early-stage U.S. VCs currently working in India will not do similar-stage deals in India because they do not have the ability to work as closely with the entrepreneurs. Today, later-stage investments in industries traditionally shunned by the U.S. venture capital industry often are the ones with exceptional exits in these markets. One venture Source: Fenwick & West LLP firm that has embraced this philosophy is Bessemer, which (continued) SVB Capital 3 December 2005
  4. 4. U.S. VC-Backed M&A Activity has invested in a publicly traded auto parts company but has ($B) not yet done a tech deal in India. Another cross-border fund, Westbridge Capital, recently invested in a hotel chain that filed to go public in India immediately after the round closed. India is currently seeing high levels of investment activity in retail, hospitality, financial services and manufac- turing. China sees some of the same dynamic in its local market investments and is expected to show significant returns in similar industries. There is Much More to be Learned Source: VentureOne and Ernst & Young Quarterly Venture Capital Report Many venture firms are just beginning to construct their plans for investing in today’s most important global markets. U.S. Deal Flow by Round Class While GPs and LPs develop strategies and plans to take advantage of the unprecedented wealth of opportunities outside the U.S., they must keep in mind these lessons about the need for local market presence, differentiated market strategies and an open mind in evaluating investments in these markets. Even those with relatively abundant experience are still learning the hard way what works and what doesn’t. Our experience with VCs breaking new ground in these dynamic markets suggests that those who are able to break away from their U.S.-centric models and Source: VentureOne and Ernst & Young Quarterly Venture Capital Report mindsets will enjoy greater success. VC Aaron Gershenberg, a managing partner with SVB Capital, and Ash Lilani, U.S. Cumulative Uninvested head of SVB Global, contributed to this report. ($B) Fenwick & West’s 3Q05 Venture Capital BarometerTM Average per share % increase or decrease from previous round of 100 SF Bay Area tech companies receiving VC investment in 3Q05 Source: Venture Economics Source: Fenwick & West LLP Complete report available at Commitments to U.S. Venture Capital Funds ($B) Fenwick & West’s 3Q05 Venture Capital BarometerTM Average per share % increase or decrease from previous round of 100 SF Bay Area tech companies receiving VC investment in 3Q05 Source: Fenwick & West LLP Source: Venture Economics Complete report available at SVB Capital 4 December 2005
  5. 5. Cumulative Vintage Year Performance as of 6/30/05 Cumulative Fund Type Performance as of 6/30/05 Venture Capital Funds (only) Calculation Type: IRR Calculation Type: IRR Source: Thomson Financial Venture Economics/NVCA Source : Thomson Financial Venture Economics/NVCA Equity Financings* for U.S. Venture-Backed Companies by Industry Group (2003-2005 YTD) *Equity financings include cash investments by professional venture capital firms, corporations, other private equity firms, and individuals into companies that have received at least one round of venture funding Source: VentureOne and Ernst & Young ISO Newsletter SVB Asset Management, Silicon Valley Bank’s registered investment advisor affiliate, publishes a weekly newsletter offering timely economic news about the technology and life science markets, and the private equity and venture capital industries. The Investment Strategy Outlook (ISO) newsletter offers readers unique insight and analysis. * * If you are unable to access the links within this document, please copy and paste the Web address to your Web browser. This update is for informational purposes only and is not a solicitation or recommendation that any particular investor should invest in any particular industry, security, or fund. SVB Europe Advisors Ltd.; SVB India Advisors Pvt. Ltd.; and SVB Business Partners (Shanghai) Co., Ltd. are subsidiaries of Silicon Valley Bank and are part of SVB Global. These subsidiaries are not licensed to carry on banking business in their respective markets and they do not engage in unlicensed banking activity. SVB Asset Management (”SAM”) is a registered investment advisor and non-bank affiliate of Silicon Valley Bank. Investments offered through SAM are not FDIC insured, are not bank guaranteed and may lose value. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any invest- ment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction. SVB Capital 5 December 2005