Current Views on Entrepreneurship Monte Jade October 11, 2007 Milton Chang [email protected] .

Current Views onEntrepreneurship

Monte JadeOctober 11, 2007

Milton [email protected]

www.incubic.com

Topics

• Current startup/funding environment

• Lessons learned from experience

• Where are the opportunities?

• Startup business models

• Take away messages

The Backdrop

Am

ou

nt

Investe

d

($B

)N

um

ber o

f Deals

Source: Dow Jones VentureOne/Ernst &Young

YTD06*: 1Q06 – 3Q06

Equity into VC-backed companies $25B annual

$19.5$22.4$23.7

$19.6$22.1

$36.4

$94.8

$49.5

$17.9$13.1

$9.2

1851240323182213

2417

3296

6341

4590

25472211

1912

$0

$25

$50

$75

$100

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005YTD06*

0

1,000

2,000

3,000

4,000

5,000

6,000

Amount Invested ($B) Number of Deals

IPO Activity Has Increased Somewhat~56 IPOs vs ~400 M&A transactions 2006

Q2 2007, 22 IPOsstill far fewer than “old days”

Am

ou

nt

Rais

ed

($

B)

Ven

ture

-Backed

IP

Os

$3.7$2.6$5.0

$1.5$1.6$1.8

$19.2$19.5

$3.7$4.6

$8.756

42

67

232022

202

250

68

120

216

$0

$5

$10

$15

$20

$25

$30

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0

50

100

150

200

250

Amount Raised ($B) Venture-Backed IPOs

Taking longer to reach IPO Median Time From Initial Funding to IPO – taking longer, mature companies

Nu

mb

er

of

Years

6.2

5.65.75.7

3.6

4.5

3.12.82.8

3.13.5

0

1

2

3

4

5

6

7

1996 1998 2000 2002 2004 2006

Source: Dow Jones VentureOne/Ernst &Young

Increasing Valuations for IPOsOnly larger value companies reach IPO – >> 1996

(Q2 2007 >$450M)

Med

ian

Pre

-Valu

ati

on

at

IPO

($

M)

$202

$166

$224$226$229

$281

$363

$314

$172

$105$79

$0

$75

$150

$225

$300

$375

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: Dow Jones VentureOne/Ernst &Young

>$400

IPOs: Amount raised prior to going public 4x more expensive than 1996, trend is upward

Med

ian

Am

ou

nt

Rais

ed

Pri

or

to

IPO

($

M)

$51.0$51.4

$73.2

$60.2

$49.0$47.8$46.9

$31.3

$22.4

$13.0$15.0

$0

$25

$50

$75

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

>$67

Gains from M&A Exits Increasing: > $50MMedian Amount Paid in M&As vs. Median Amount Raised Prior to M&A

< 100 companies per quarter

Med

ian

Am

ou

nt

Rais

ed

Pri

or

to

M&

A (

$M

)M

ed

ian

Am

ou

nt P

aid

($

M)

$17 $19

$23$21$20$15$10$11$7$6$6

$52$47

$39

$24

$18

$27

$100

$55

$31$33$40

$0

$25

$50

$75

$100

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

$0

$25

$50

$75

$100

Median Equity Raised Prior to M&A Median Amount Paid ($M)

Source: Dow Jones VentureOne/Ernst &Young

Older Companies Being AcquiredMedian Time From Initial Equity Funding to M&A taking longer

Nu

mb

er

of

Years

4.7

3.5

3.0 2.82.4

2.0

2.8

3.7

4.7

5.4

6.0

0

2

4

6

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: Dow Jones VentureOne/Ernst &Young

Venture industry 2006-Q2 2007

- Equity into VC backed companies about 25B annually

- IPO activity increased, 22 in Q2 2007, - Medium IPO Pre 452M Vs 202 last year- Taking over 6 years to IPO- Takes more $ to get to IPO, $67M median

- M&A around 100 exits per quarter, median 52M value- Raise prior to M&A Medium $23M - They take 6 years also

Environment Moving Forward

Interpretation, VC Trends > 2007

- “Megafunds”- Geared for >$500M IPOs - International offices, India, China, Israel- Aligned with the banking industry

- Smaller funds - Open for first-time entrepreneurs- Geared for >50M M&A, potentially larger- Looking for capital efficient investment (<$20M all-in)

“Trend” areas of interest, 2007Areas of current VC interest 1. Web 2.0

- the next “YouTube”, “you”, gaming, entertainment, advertising

- 2. Mobile phenomenon.- Connected life – web, WAP, advertising

- 3. All the IT to support web and mobile - 1B/year handsets drive “disposable Moore’s law”- Video traffic majority of all network bandwidth- Semiconductor, networking, security

- 4. Cleantech- Alternative energy- Now >10% of venture investing, >$2B per year

- 5. Healthcare- >$95B technology market – split:

- aging/vascular/obesity/orthopedics- healthy/vanity/aesthetics

What I Do/did To Provide A Context

Built Ruby laser in 1964

Laser components and tools: Newport; Uniphase; Lightwave; New Focus…

Laser applications: Iridex…

Laser serving new fields: Arcturus

Make available entrepreneurial experience as resource for first-time entrepreneurs: Incubic

Communications: OpVista…

Lessons Learned

It takes more than a useful product idea; everything has to be aligned : Business model consistent with size of the opportunity, personal objectives, resources, team capability, financing strategy… Execution: being an industry- insider in the “power-structure”…..investor support and being connected to the financial community

Most failures are due to overly ambitious goals. The business model should focus on creating value efficiently, capitalizing on your strengths and competitive advantages…

Considerations When Starting A Business

Where are the opportunities? 1) Random “good” ideas

2) Your own area of expertise – industry insider

3) New emerging technologies areas

Startup Models (How people start businesses)

1) Traditional Sand Hill Road VC funded startup

2) Start with business “prototype”…and grow over time

3) “Lifestyle” business

Summary

Back to basics: Capital efficiency, ROI, competitive advantages

A successful startup requires a useful product idea, alignment of business strategy and “resources,” plus active participation of industry insiders

A startup company should first focus on capitalizing on its strengths to create value efficiently by building a “prototype” of the business

Turn over new rock: Serve emerging fields with your expertise, and to become an industry insider over time

What Chancellor Tien Would Have Said…

Take Away Messages

• Prepare for entrepreneurship by taking on projects at work.

• Think small: You are more likely to succeed with a modest goal.

• Think long-term: Entrepreneurship is a life-long preoccupation. Once you have a success, even a small success, opportunities are likely to come your way.

• Seek self-consistency. Plan thoroughly. Do both top-down and bottom-up analysis of your business idea.

• The objective is not just to start; it is to build a business to successful completion. Before that, it is just a job!

[email protected]