Slide Presentation

The All-Important Ecosystem

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AGENDA

Summary of Funding Sources in the EcoSystem Impact on the Economy/Jobs Fund Raising and Resources Exit Scenario Threats and Opportunities

Source: Venture Impact 2009 by IHS Global Insight

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Many Options to Choose From Entrepreneur Personal Funds “Friends and Family” Personal credit card and other borrowings Angel investors/Angel networks/Angel funds Venture capital Corporate direct investment Venture leasing Mezzanine Financing Merger and Acquisition Initial Public Offering Secondary/Follow-on Public Offering Private Placements – Debt & Equity Buyout/Acquisition Financing Corporate Debt

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What is an Angel Investor?

Type of Capital Accredited?Portfolio Company

OwnershipExperience of

Angel

ACEF Equity Required Not Family Wide Variety

Mason/EBAN Equity ? ?Management or

Entrepreneur

Shane/SBA Debt or Equity Not Required Not Family or Friend Wide Variety

Sohl/CVR/UNH Equity ? ? ?

Individual who puts own private money directly into a private business (different definitions)

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Angel Groups are Small - but Important - Subset of All American Angels

4,200,000

InformalInvestors

3 study estimates

Investors in Angel Groups

Active Angels

Center for Venture

Research

U.S. Millionaires

1,000,000

225,000

12,000

2009 Report from Spectrem: $1 millionaires down in 2008 27%, those with $5 million down 28% World Wealth Report (Capgemini): 19% drop in HNWI and 22.8% drop in wealth in 2008

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Why Angel Networks/Funds Group of individual angel investors that recognize

the value in the Power of Mindshare Aggregating investment dollars Aggregating knowledge, experience Aggregating industry connections Collective Due Diligence

Mitigate Risk - Diversified portfolio

Higher Quality Deal Flow Greater Investment Clout – Strength in numbers

Continuity through Portfolio Management

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Growth in Number of American Angel Groups

Sources: Center for Venture Research (pre 03 data) and Kauffman Foundation/ACEF (04-09 data)

0

50

100

150

200

250

300

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

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Funding Gap

Investment (one round)

Nu

mb

er o

f In

vest

ors

$5MM $10MM

Seed

Venture CapitalGAP

Stage Pre-Seed Seed / Start-Up

Funding Gap between $1,000,000 and

$3,000,000/$5,000,000(depending on region)

Expansion(Launch)

Later(Growth)

Source Friends and

Family

Lone AngelsAnd

IncubatorsVenture Capital

Investment$25,000 to $100,000

$100,000 to $1,000,000

$3,000,000 and up

Early Stage

VC Ecosystem

LPs

Companies

Exits

Distrib to LPs, GPs

XYZ Ventures (“GP”, “Mgt Co”, “Manager”)

XYZ Fund #1

1996

Early Stage IT

$200M

5-8+ yrs

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VC Ecosystem – One Venture Firm

LPs

Companies

Exits

Distrib to LPs, GPs

XYZ Ventures (“GP”, “Mgt Co”, “Manager”)

XYZ Fund #1

1996

Early Stage IT

$200M

5-8+ yrs

LPs

Companies

Exits

Distrib to LPs, GPs

XYZ Fund #2

1999

Early Stage IT

$400M

5-8+ yrs

LPs

Companies

Exits

Distrib to LPs, GPs

XYZ Fund #3

2003

Early Stage IT

$300M

5-8+ yrs

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US Venture Capital Investment in Perspective

$16,700

$4,777

$2,000$800

$179$0

$2,000

$4,000$6,000

$8,000$10,000

$12,000$14,000$16,000

$18,000

NYSE MktValue

Equity MutualFunds

Hedge Funds Buyout Funds(Est)

VentureCapital

Source: AIMA, Investment Company Institute, NYSE.com, Thomson Reuters, NVCA

Assets Under Management

US GDP is $12.5 Trillion Venture

capital = 0.2% of US GDP

Bil

lio

ns

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• $17.60 billion• ~57,000 deals

• 35% seed/startup• 47% early stage

• ~ 259,500 individuals

Angel Investors 2009• US$ 17.69 billion

• ~2,800 deals• 9% seed/startup

• 65% later/expansion capital• Total 794 firms (not all active)

Venture Capital 2009

Funding by Source and Stage- 2009

6,1608,272

2,640

1,596

4,672

5,511

5,912

5280

2,500

5,000

7,500

10,000

12,500

15,000

Seed Early Expansion Later

Investment Stage

US

$ M

illion

s

Venture CapitalAngels

Sources: Center for

Venture Research and

PwC MoneyTree

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The Economic Impact of Angel and Venture Capital on the US Economy ...

It’s Not Just Deals and Exits!

So how do we measure the results?

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Global Insight Study In 2008, venture backed companies:

Provided 12.05 million US jobs Had sales of $2.9 trillion

Represents 20.5% of GDP

Still dominated venture-created sectors 74% of telecommunications jobs 81% of software jobs 55% of semiconductor revenue 67% of electronics/instrumentation revenue

Source: Venture Impact 2009 by IHS Global Insight

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Kauffman Foundation Study

Companies that benefited from Angel Investors: Alcoa, Home Depot, Google, Amazon (few examples)

Such companies are less than 1% of all companies but generated 10% of new jobs

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JOB CREATORS

From 1980 to 2005… firms less than five years old accounted for all net job growth in the United States.

SBA: Business Dynamics Statistics Briefing

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Job Creators

Source: Business Dynamics Statistics Briefing: Jobs Created from Business Startups in the United States.

Census Bureau and Kauffman Foundation, January 200917

Venture Capital Investment is Productive ...

For VC every dollar invested in 1970-2001, there was $9.88 in US revenue during 2008

For every $24,564 of venture capital invested in 1970-2001, there was one job in the year 2008

Note these ratios are based on investment through 2001 ($296B) because investment after that time has likely had little effect on jobs and revenues. If investment 1970-2008 ($456.2B) is used, the ratios would be $6.28 and $38,606 respectively

Source: Venture Impact 2008 by IHS Global Insight

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Questions & Answers

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Fundraising & Resources

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AUM peaked at $276B, now $179B;# Firms down from 1023 peak to 794

0

200

400

600

800

1,000

1,200

1980

1981

1982

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1986

1987

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1989

1990

1991

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1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

$0

$50

$100

$150

$200

$250

$300

# Firms AUM $B

Source: NVCA 2010 Yearbook prepared by Thomson Reuters

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Economic Cycles Impact Both

Angel Investments $19.2B in 2008 $26B in 2007 $25.6B in 2006 $21B in 2005 $22.5B in 2004 $18B in 2003 $15B in 2002

UNH Center for Venture Research

VC Investments $28.3B in 2008 $29.4B in 2007 $22B in 2006

$21.5B in 2005 $21.5B in 2004 $19.4B in 2003 $21.4B in 2002

PWC Moneytree

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Investment Marches On -Rumors that the Venture Industry has stopped investing are greatly

exaggerated

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VC Investment Peaked in 2000;

2008 Was Down 8%; 2009 was $18B

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$ M

illi

on

In

vest

ed

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

1Q10

Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report,Data: Thomson Reuters

$103B

$28B

$18B

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$0

$5

$10

Total VC $B 5.9 5.8 6.3 7.1 6.6 6.3 7.3 7.3 7.7 8.0 7.7 7.4 7.1 5.9 3.4 4.1 5.1 5.2 4.7

3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10

Industry Investment is in a Smaller Size Band than 2002-mid2008 Period

Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data: Thomson Reuters

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First time venture fundings: The Industry is smaller but still funded 755 in 2009

-

500

1,000

1,500

2,000

2,500

3,000

3,500

First Fundings 1,140 1,291 1,412 2,439 3,365 1,219 831 760 929 1,038 1,233 1,331 1,232 755 208

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1Q10

Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report,Data: Thomson Reuters

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Economy Affects ACA Member Investment in 2009

Average Number of Investments Per Group

2007 7.3

2008 6.3

2009 6.3

PRELIMINARY DATA: ACA Confidence Survey, March 2010 Self reported data, not verified, still collecting data

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Range of Performance

Increases in valuation (up rounds) dominated until the economic meltdown

Equilibrium being restored?

Data: Fenwick & West Quaterly Survey

Valuations in Silicon Valley

0%

20%

40%

60%

80%

100%

Q1’06 Q2’06 Q3’06 Q4’06 Q1’07 Q2’07 Q3’07 Q4’07 Q1’08 Q2’08 Q3’08 Q4’08 Q1’09 Q2’09 Q3’09 Q4’09

Source: Fenwick & West Quarterly Surveys

Perc

en

t

DownFlatUp

The Exit Scene - the importance of acquisitions has become clear over the past several years

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0

50

100

150

200

250

300

# IPOs 270 264 41 22 29 93 56 57 86 5 0 1 0 0 5 3 4 14

1999 2000 2001 2002 2003 2004 2005 2006 2007 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09YTD1

0

A Capital Crisis?Few IPOS Post-Bubble; Many Good Companies in the Wings

Source: Thomson Reuters/National Venture Capital Association

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0

20

40

60

80

IPOs Done 12 31 5 0 1 0 0 5 3 4 14

In Reg on last day 72 60 37 42 38 28 26 10 18 29 45

3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 YTD

What’s in the IPO Pipeline?Dismal Short Term…Don’t confuse “uptick” with “recovery”…

Source: Thomson Reuters/National Venture Capital Association – Updated 4/23/2010

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Those Few Acquisitions Which Do Happen Are Generally Awful

0%

20%

40%

60%

80%

100%

% o

f K

no

wn

M&

A E

xit

s

>10x TVI 1 2 2 7

4x-10x TVI 2 3 7 10

1x-4x TVI 3 2 2 9

< TVI 8 5 11 8

1Q09 2Q09 3Q09 4Q09

Source: Thomson Reuters/National Venture Capital Association – Undisclosed txns are prorated

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Why aren’t portcos being snapped up? Sure we could keep buying small companies

and G.E.-ize them. But we've learned that it's better to partner with the #3 company that wants to be #1 than to buy a tiny company or go it alone

Jeffrey Immelt CEO of GE quoted in Post-

American World

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Venture Exit Counts- IPOs and M&A by Year - 2008 is Dismal!

0

100

200

300

400

500

600

700

Nu

mb

er o

f Is

sues

M&AIPO

M&A 74 100 97 116 164 209 240 317 353 319 284 346 351 370 360 335 262

IPO 220 166 202 270 136 77 260 264 41 24 29 93 56 57 86 6 12

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Thomson Reuters/National Venture Capital Association

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Angels are fine with M & A

Quarterly PE Exits by Corporate Acquisition, IPO and Secondary Sale

Percentage of capital invested by industry

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Performance

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Venture Capital Returns: Still Around 20% over the long haul net to the LPs

Through Q3 2009Source: Cambridge Associates U.S Venture Capital Index®, the performance benchmark of the National Venture Capital Association

Period Ending 1 Qtr 1 Year 10 Year 20 Year

09/30/2009 (Current) 2.3% -12.4% 8.4% 23.1%

03/31/2009 (6 mos ago) -2.9% -17.5% 26.2% 22.5%

12/31/2008 (Prior) -12.5% -16.5% 35.0% 22.3%

DJIA 15.8% -7.4% 1.6% 9.2%

NASDAQ Composite 17.7% 1.5% -2.5% 7.8%

S&P 500 15.6% -6.9% -0.2% 8.0%

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A Word About Return Expectations

Angel investing is VERY risky 1 or 2 of every 10 investments brings most of return Hard to tell which companies will return

Current return estimates for portfolios: Annual IRR of 27% - 2.6X in 3.5 years*

If business gets VC funding later, angel investment is often diluted

Some really great angels therefore looking for 10 to 30X potential Wide variety of expectations, depending on mix of

motivations to be an angel Correct valuation is critical

*Source: Rob Wiltbank, Willamette University, November, 2007 paper 38

Threats and Opportunities….

The Crystal Ball?

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“Buy low… sell high” is easier if you really buy low!

CompanyTotal Venture

Investment $M

Recent Market Cap/ Acq Price $M

[1/2009]

Cisco 3 89,760

eBay 7 16,460

Amazon.com 8 20,550

Apple 9 71,450

YouTube 12 1,650

Google 40 90,610

JetBlue 173 1,710

WebVan 441 0Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data: Thomson Reuters

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Key US VC building blocks ...Our Ecosystem!

Capital formation Prudent man rule – enabled pension investment LP laws Capital gains tax reduction

Empowered entrepreneurs Capital gains tax reductions Stock options/team building tools Reasonable bankruptcy laws

Protect companies – IP laws Abundant customers willing to do business with SMEs Exit markets – the NASDAQ Face-to-face investing/proximity Cultural acceptance

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Key Policy Issues for Angels – and the Entrepreneurs They Invest in Senate Financial Reform Bill

1,300 page bill with two problem paragraphs Increase accredited investor definition for inflation Repeal Federal preemption of state regulation over “accredited

investor” securities offerings

Federal Tax Credits for Angels ACA consulted on two of three bills being drafted

Obama Administration Stimulus (Reduce taxes on QSBS) Increase Qualified Small Business Stock exemption to 100% and

extend it to more years.

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Questions & Answers

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