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Quigley Report: A Venture Capital Revival is Upon Us

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Venture capital was one of the best asset classes in the world before the dot-com bubble burst. Over the next 10 years, returns plummeted as a result of too much capital in the sector and a lack of public market liquidity.

Then, just as the start-up world was recovering from the tech bubble of the last decade and the negative effects of the ill-considered Sarbanes Oxley legislation, the 2008 financial erupted.
So today, the venture capital community finds itself at a cross roads. While the asset class has been largely abandoned by institutional investors, this disinterest will paradoxically lead to superior returns in the future.

Consider…….
1. Venture capital is no longer be considered a “necessary asset class” to invest in by many limited partners given the sectors insignificant size relative to the financial assets LPs have under management

3. Limited partners, who generally look retrospectively to determine their portfolio allocations, not progressively, have shunned the asset class.

4. But, as a result of this shaking out of the venture capital sector (in terms of #’s of firms and amount of capital raised by those firms) conditions are now actually favorable for sustained long term returns

Taking a data-driven prospective, this presentation argues that the conditions today in the private and public capital markets bode well for superior performance to return to the venture capital asset class this decade. Specifically, therewards accruing to private investors in the leading tech companies of today far exceed what private investors used to earn from their investment in the best companies of previous tech cycles. Several things have changed in the past 5 years or so that have led to this change. This presentation explores what those changes have been.

Published in: Technology
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Quigley Report: A Venture Capital Revival is Upon Us

  1. A Venture Capital ! Revival! Is Upon UsR .I.P.
  2. RT @MarkTwain The reports of my death have been greatly exaggerated.
C L E A R S T O N E
 William Quigley Managing Director

  3. 10 Years ago… The decade began on a high note… but quickly evolved into extraordinary difficult times."C L E A R S T O N E
 William Quigley Managing Director

  4. Unstable Situation "Venture Capital Environment - Circa 2000/2001 " 2000 / 2001 Trend Direction… Valuations Very high Falling Capital availability Substantial Beginning to tighten Fund commitments $83B & Big Overhang Shrinking # of Active Firms 1338 At a high but going down Tracking index – NASDAQ 4000 Falling rapidly Technology spending Historically High Dropping quickly
  5. VC Fundraising and Performance " Plummet After a 7X Increase in Capital in Just 4 years $  90   80    $83     70   60   50  $B    $57     40    $45     30   20    $27     10    $17      $19      $12      $9     0   1996   1997   1998   1999   2000   2001   2002   2003  Source: DowJones VentureSource, NVCA.
  6. In the 2000s" Venture Capital Exits Shifted from IPOs to Less Valuable M&A VC  Exits:  ‘91  –  ‘00   VC  Exists:    ‘01  –  ‘‘09 VC Exits: ‘01 – 09   IPO   12%   M&A   42%   IPO   58%   M&A   88%  Source: NVCA.
  7. 10 Years Later….C L E A R S T O N E
 William Quigley Managing Director

  8. The market is now poised for " breakout performance.
  9. Conditions have improved considerably helped by a "reduction in capital and firms.
  10. Venture Capital Fundraising" Has Been in Decline Since 2007 $90   $80   $70    $83     $60   $50   $B   $40    $45     $30    $37      $30     $20    $28      $21      $27     $10    $19      $15      $9      $12     $0   2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   2010  Source: DowJones VentureSource.
  11. Venture capital fundingcommitments to ITare even less than meets the eye. Because……
  12. Much of the recent LP funding to venture capital has gone into Cleantech
  13. Cleantech Share " Venture Investments Up 8X Cleantech investments have crowded-out other sectors, further decreasing funds directed towards IT investing.Source: NVCA.
  14. The US economy has grown almost 50% since 2000 " yet…
  15. less ventureThere is capital under management today than there was 10 years ago.
  16. Venture Capital Assets Under Management Are " Lower Today Than They Were a Decade Ago 300   $262   $270   $277   $253   $253   $254   $255   250   $225   $204   200   $179   150   $B 100   50   0   2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   Venture capital investments are now outpacing new funding commitments by LPs, draining the pool of investable capital."Source: NVCA.
  17. Venture Capital Fundraising As a % of GDP " Has Rapidly Fallen $16    $14.1   $14.4   $14.7   1.0%   $13.4   $14.1   $14   $11.1   $11.9   $12.6   0.8%   $12   $10.3   $10.6   $10.0   $10   0.6%   $T   $8   $6   0.4%   $4   0.2%   $2   $0   0.0%   2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   2010   Venture Capital fundraising as a % of GDP has been declining since 2000.Source: DowJones VentureSource, Bureau of Economic Analysis.
  18. Consider…C L E A R S T O N E
 William Quigley Managing Director

  19. American Reinvestment and Recovery Act of 2009$787 Billion  
  20. New Commitments To Venture Capital Funds in 2009? $15 Billion  
  21. But After a Long Shake Out, " Attractive Conditions Ahead…"•  Venture capital fund commitments down for last 3 years –  Positive contra-indicator•  Early stage valuations stable… –  While late stage and IPO valuations growing•  Strong public market appetite for growth stories –  Recent IPOs in the enterprise and consumer services sectors well received
  22. Venture Capital Firms" Only the Strongest Survived the Post-Bubble Shake-Out Ac=ve  Informa=on  Technology  Investors   1600   #  of  Ac=ve  Firms   1400   1200   1000   712   514   398   381   800   449   405   416   426   375   313   >3  Deals/yr   600   400   726   724   672   <=3  Deals   626   591   613   597   572   614   572   200   0   2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   Active Investors Down" – 712 active investors in 2000 versus 313 in 2009, a 56% decline." Average Fund Size Increased" – $165M in 2000 versus $200MM in 2009."Source: DowJones VentureSource.
  23. Venture-Backed IPOs Will Return to Pre Financial Crisis Levels in 2011 100   86   80   No. of Venture-Backed OPO’s 80   72   57   57   60   40   20   12   6   0   2005   2006   2007   2008   2009   2010   2011E   A new generation of large market cap tech companies will increase the field of acquirers.Source: NVCA and Clearstone analysis.Selected IPO’s shown in 2011. LinkedIn and Pandora have filed for IPO. Facebook and Groupon IPO are market speculation.
  24. VC Environment Today"Attractive Conditions Economic Situation" 2011 Trend Direction… Valuations Moderate Rising in Certain Growth Markets Capital availability Adequate Stable Stable but trending down Fund commitments $~12B 1/2 of the high & # of Active Firms ~300 shrinking Tracking index – Stable with IPO market 2800 NASDAQ open Good and rising in someTechnology spending Stable sectors
  25. “theHave you heard the maxim venture model is broken” in the last 6 months?
  26. That question was really asking “are VCs being rewarded for their work anymore?”
  27. The Answer? YES!
  28. More so than earlier tech cycles, private investors are being rewarded for potential break out value at IPO…. Lets look back at the so called venture capital golden age…..
  29. The Golden AgeC L E A R S T O N E
 William Quigley Managing Director

  30. How were the iconic tech companies of the past valued when they went public?
  31. IPO Date: 1986CY 1986 Revenues: $198MCY 1987 Revenues: $346M
  32. IPO Valuation? $650M~1.8X Revenue
  33. IPO Date: 1990CY 1990 Revenues: $69MCY 1991 Revenues: $183M
  34. IPO Valuation? $225M~1.25X Revenue
  35. IPO Date: 1997CY 1997 Revenues: $148MCY 1998 Revenues: $610M
  36. IPO Valuation? $440M~0.7X Revenue
  37. IPO Date: 1999CY 1999 Revenues: $103MCY 2000 Revenues: $647M
  38. IPO Valuation? $1.5B~2.2X Revenue
  39. IPO Date: 1989CY 1989 Revenues: $64MCY1990 Revenues: $102M
  40. IPO Valuation? $73M~0.7X Revenue
  41. How do the Golden Age companies compare to Today’s leadingtech companies?
  42. More Value Accruing to Venture Investors, "Not Public Shareholders $70 $70 $60 Pre-Money IPO Valuations $50 Public investors $40 $40 participated in 99% of the $B terminal value of these $30 companies $20 $12 $10 $0.23 $0.44 $.065 $0 Cisco Amazon Microsoft VMware Google Facebook Earlier Tech New Tech Cycles Cycle Source: Facebook Pre-Money IPO valuation $70B per SharesPost private market exchange – February 2011.
  43. IPO Valuations Now Exceed the Level " Reached During the Tech Bubble $  1200   1000   800   15   $  Millions   600   12   11   400   9   9   9   9   9   8   8   9   8   8   10   9   10   10   7   7   5   200   0   1990   1992   1994   1996   1998   2000   2002   2004   2006   2008   Mean  Company  Age  at  IPO   Mean  Pre-­‐Money  ValuaKon   Mean pre-money IPO valuations of venture backed companies have increased at a 16% CAGR since 1990, while company age at IPO has remained relatively even.Source: NVCA.
  44. So why are earlystage companies capturing more value?
  45. 3 Things Have ChangedC L E A R S T O N E
 William Quigley Managing Director

  46. 1.  Internet Growth Internet Companies Can Reach Critical Mass Faster % Global Users 2000  vs.  2010  Number  of  Internet  Users  (millions)    22.5    21.4% China*    420.0      124.0    12.2% United  States    239.2      47.1     5.0% Japan    99.1      5.0     4.1% India    81.0      5.0     3.7% Brazil*    72.0     2000    24.0     2010   3.3% Germany    65.1      3.1     3.0% Russia    59.7      15.4     2.6% UK    51.4      8.5     2.3% France    44.6      19.0     2.0% South  Korea    39.4    Source: Internet World Stats. 2010 data as of June 2010*China figures do not include SAR Hong Kong, SAR Macao and Taiwan. Brazil data for 2009
  47. 2. Capital Markets Better Informed Proliferation of technology specialists in the public markets Hedge  Fund  Industry  Growth   2.0    12,000     1.6    10,000      8,000     1.2    6,000     0.8    4,000     0.4    2,000     0.0    -­‐     1990   1991   1992   1993   1994   1995   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   Number  of  Hedge  Funds   $AUM  Trillions   More hedge funds = more specialized public investors who understand the growth prospects of tech companies.Source: Hedge Fund Research.
  48. 3. Going Global, Faster Start-ups Expanding Offshore Earlier in their Lifecycle  $5.7      $1.2     2000   2010   China  GDP    $2.0        $0.6      $1.4     2000   2010   Brazil  GDP    $0.5     2000   2010   India  GDP   Groupon  already  has  35  interna=onal  offices!    $  Trillions  Source: International Monetary Fund.
  49. A Venture Capital Revival Is Upon Us •  Conditions are better today for private investors than they have been in over a decade •  Fewer VC investors are putting capital to work •  Public investors are shifting their allocations back to emerging growth stories   •  This is not a repeat of the dot com and telecom bubbles circa 1999-2000 •  Today’s tech cycle leaders have global reach and hyper attractive economics•  A new era technology start-up era has emerged •  Companies are scaling faster and accruing value sooner than ever before
  50. So what will drive venture returns this decade?•  Overallocated to right sectors•  The best funds are sector funds•  IPO market will be healthy•  New sources of liquidity like second market
  51. The Venture Capital Model Will Evolve •  Greater liquidity to LPs provided by an increasingly active secondary position market•  Shortening of the VC investment cycle. Funds will shift from 5 year investment terms to 3 years•  Growth in sector focused funds
  52. MobileC L E A R S T O N E
 William Quigley Managing Director

  53. Mobile is a Burgeoning Market, Driven by Smartphone Sales and… Apple  iPhone:  Cumula=ve  Units  Shipped    100      90      80      70      60     Millions    50      40     iPhone    30      20      10      -­‐    Source: Apple company filings
  54. …Tablet Proliferation 2010  –  2015  Tablet  Sales  and  Users  (Millions)   50   90   80   40   70  Tablet PC Tablet PC Users Sales 60   30   50   40   20   30   10   20   10   0   0   2010   2011   2012   2013   2014   2015   Total  Tablet  PC  Users  (US)   Tablet  PC  Sales  (US)  Source: Forrester
  55. CloudC L E A R S T O N E
 William Quigley Managing Director

  56. Mass Adoption of Cloud Computing is Expected to Help the Market Grow to $150 Billion by 2013 Cloud  Services  Market  Size  (Billions)  $160   $150  $140  $120   $114  $100   $89   $80   $71   $56   $60   $46   $40   $20   $0   2008   2009   2010   2011   2012   2013  Source: Gartner
  57. Mass Adoption of Cloud Computing is Expected to Help the Market Grow to $150 Billion by 2013 Percentage  of  PC  Unit  Sales,  US   24%   20%   18%   17%   16%   39%   30%   46%   32%   32%   33%   34%   34%   Desktops   39%   Notebooks/laptops   12%   12%   12%   12%   44%   13%   Netbooks/minis   46%   15%   38%   38%   38%   Tablets   29%   36%   17%   15%   8%   0   0   2008   2009   2010   2011   2012   2013   2014   2015   “With Microsoft, Google, and others investing in consumer cloud services, we anticipate a virtuous cycle of adoption of tablets driving adoption of cloud services and vice versa.” -ForresterSource: Forrester
  58. Social Networking & Online GamesC L E A R S T O N E
 William Quigley Managing Director

  59. Money flows to where people spend their time…..
  60. Social Networks and Online Games Increasingly Dominate Internet Usage Share  of  Time  Online:  June  2010   Social  Networks,   23%   Other,  34%   Classified/AucKon,   Online  Games,   3%   10%   MulK-­‐category   E-­‐mail,  8%   Entertainment,  3%   Soeware   Portals,  4%   Manufacturers,  3%   Instant  Messaging,   4%   Search,  4%   Videos/Movies,  4%   Social networks and online games grew 31% in 2010 and now account for 33% of all time onlineSource: Nielsen
  61. Presented By:" William Quigley Managing Director
C L E A R S T O N E


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