The Role of Venture Capital in the US Economy

National Venture Capital Association

Venture Capital’s Voice:Public Policy & American Competitiveness

Robert E. GradyRobert E. GradyManaging Director, The Carlyle GroupManaging Director, The Carlyle GroupChairman, NVCAChairman, NVCAChicago, IllinoisChicago, IllinoisDecember 6, 2006December 6, 2006

The Role of Venture Capital in the US

Economy

Venture Capital has grown up

Source: 2004 NVCA Yearbook, prepared by Venture Economics, page 18

At Year End

# Venture Firms

Capital Under Mgt

1970 28 $1B 1980 89 $4B 1990 399 $31B 2001 943 $257B 2004 1,068 $261B

Venture Capital Has Been Good for Investors

Fund Type 1 Year 3 Year 10 Year 20 Year

All Venture 16.2 9.0 20.8 16.5

All Buyouts 27.3 16.3 8.9 13.4

NASDAQ 5.6 10.2 6.2 11.7

S&P 500 6.7 9.2 6.6 9.8

Investment Horizon Performance - as of 6/30/06

Venture Capital: America’s Job-Creating Engine In 2003, venture-backed companies:

Provided 10.1 million US jobs (9.4% of all US employment) Had sales of $1.8 trillion (9.6% of all US GDP) 10% of US economy on < 2% of capital invested since 1970

VC-backed companies outperformed during economic softness:

Between 2000 and 2003: US private sector jobs down 2.3%... Venture backed companies grew jobs by 6.5%

Sales nationally up 6.5% Sales at venture backed companies up 11.6%

Source: Venture Impact 2004 by Global Insight (Wharton/DRI)

Venture capital is invested broadly in the US

Northern California

24%

Southern California

5%

New England

14%

New York5%

Texas12%

Northwest1%

Mid-Atlantic2%

Midwest3%

Southwest12%

South Central

1%North

Central4%

Other4%

Southeast12%

Colorado1%

Source: NVCA and Thomson VentureXpert, 2006.

1970

New England

13%

Texas14%

Northwest1%

Mid-Atlantic8%

Midwest5%

Southwest2%

New York7%

Southern California

11%

Northern California

25%

South Central

2%

North Central

3%

Other0%

Southeast4%

Colorado5%

1980

Northwest3%

Mid-Atlantic7%

Southwest1%

Midwest7%

Texas5%

New York7%

New England

15%

Southern California

12%

Northern California

33%

South Central

0%

North Central

2% Other0%

Southeast5%

Colorado3%

1990

Northern California

35%

Southern California

12%

Southwest3%

Midwest4%

Mid-Atlantic7%Northwest

4%

Texas5%

New York8%

New England

12%

South Central

0%

North Central

1% Other0%

Southeast6%

Colorado3%

2005

Jobs in All 50 States California 2.5MM Texas 899,000 Massachusetts 712,000 Pennsylvania 604,000 Georgia 551,000 Tennessee 543,000 New York 471,000 Washington 400,000 Virginia 333,000 Illinois 235,941

Source: Venture Impact 2004 by Global Insight

VC’s Contribution to Productivity:Annual Productivity Growth: 1970s vs. 1990s

2.2% 2.1%

3.0%

3.4%

3.9%

1.2%

3.5%

2.7%2.6%2.3%

0.1%0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: U.S. Bureau of Economic Analysis, 2006.

1

2.1%

(1.3%)(0.5%)

0.7%1.2%

3.4%

(2.9%)

2.6%3.4%

3.7%

0.3%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

Gro

wth

in o

utp

ut

per

per

son

Gro

wth

in o

utp

ut

per

per

son

Market Trends:Venture Capital Today

VC Fundraising 1996 – 2006 (thru Q3)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

$B Gross 7.8 10.1 11.6 18.1 30.6 58.2 106.6 38.0 3.9 10.7 18.6 27.0 25.4

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 20052006 (Q3)

Source: VentureXpert™ Database by VE & NVCA

Computer Hardware Sales$473.2

$429.8

$387.2

$366.9$392.1

$401.7

$335.9

$266.0

$212.7

$164.8

$132.7$107.8

$92.4$80.5

$67.6$63.8

$0.0

$100.0

$200.0

$300.0

$400.0

$500.0

1990199119921993199419951996199719981999200020012002200320042005

Source: U.S. Bureau of Economic Analysis, 2006.

Computer Software Sales

$206.2

$195.0

$177.3

$169.7$173.8

$176.2

$157.2

$129.4

$108.8

$84.1

$71.6$65.1

$59.3$53.0$45.1

$39.9

$0.0

$50.0

$100.0

$150.0

$200.0

$250.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: U.S. Bureau of Economic Analysis, 2006.

RFID Hardware Sales$1,944.0

$1,530.0

$1,134.0

$810.0

$540.0

$372.0$275.8

$0.0

$500.0

$1,000.0

$1,500.0

$2,000.0

2004 2005E 2006E 2007E 2008E 2009E 2010E

Source: Gartner, Sept 2005.

$6,741

$5,994

$4,954 $4,832$5,057

$6,352 $6,243$6,775

$6,226

$5,695

$6,300

$5,635$5,785

$5,191$5,558

$4,817

$4,318

$4,534$4,517

Tot

al A

mt I

nves

ted

($M

)

0

100

200

300

400

500

600

700

800

900

# C

os. F

inan

ced

Venture Capital InvestmentQ1 2002 – Q3 2006

Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report; Data: Thomson Financial

Cell Phone Users2,236

2,124

1,987

1,846

1,685

1,519

0

500

1,000

1,500

2,000

2,500

2004 2005 2006 2007 2008 2009

Source: IDC, April 2005.

(# in mils)

Mobile Device Explosion2,236

2,124

1,987

1,846

1,685

1,519

1,000

1,500

2,000

2,500

2004 2005 2006 2007 2008 2009

Source: IDC, April 2005Source: IDC, April 2005

(# in mil)

Source: Motorola, October 2006

Time to achieve 1st billion users:Time to achieve 1st billion users: 20 20

yearsyears

Time to achieve 2nd billion users:Time to achieve 2nd billion users: 3 3

yearsyears

Time to achieve 3rd billion users:Time to achieve 3rd billion users: 2 2

yearsyears

Source: Frost & Sullivan

Rapid Growth in Medical Devices

Market size: $63.8 billion (2004)

Key Growth Drivers: Tech innovation Aging of population Rise in wealth Physician/patient

acceptance CAGR of 11.7% from

2004-2011, to $139.9 billion

$47.2 $50.8$57.6 $63.8

$71.7$80.1

$89.4$99.1

$110.2$123.5

$139.9

0

20

40

60

80

100

120

$140

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Rev

enu

es

s

($ in billions)

U.S. MEDICAL DEVICE INDUSTRY: REVENUE FORECASTS, 2001 – 2011

Software as a Service/”On Demand” CAGR (’04-’09): 28% (IDC) Benefits:

Pricing Measurability Security Manageability

U.S. On-demand software revenues

1,4411,999

2,577

3,299

4,050

4,881

0

1,000

2,000

3,000

4,000

5,000

6,000

2004 $2,005 2006 2007 2008 2009Source: IDC

$ in mil

2004-09 CAGR: 28%

Source: America’s Growth Capital

Tech IPOs Enter 6th Year of Darkness

Venture Exit Counts- IPOs and M&A by Year

0

100

200

300

400

500

600

700

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

'00

'01

'02

'03

3Q

06

Year

Nu

mb

er

of

Tra

nsacti

on

s

M&A

IPO

Source: Thomson Financial/National Venture Capital Association

M&A vs. IPO for Venture Exits

263242

37 21 2783

45

240317

353 316 293339

344

0%

20%

40%

60%

80%

100%

1999 2000 2001 2002 2003 2004 2005

IPO M&A

Source: National Venture Capital Association.

Storm Clouds Confronting the U.S. Venture Capital Industry (partial list)

Stock Option Expensing and 409(A)

U.S. Budget Priority Setting and the R & D Enterprise

The Search for Talent and H-1B Visas

The Next Generation and K-12 education

Sarbanes-Oxley

Smooth Functioning of the Capital Markets

What We Are Doing About It:

NVCA’s Public Policy Agenda

“MAGNET USA”: A Competitiveness Agenda for America Invest in R & D

Federal commitment to sustained funding for basic science Attract the Best and the Brightest

Companies need access to hire key talent Reverse unduly onerous post-9/11 procedures Increase Caps on H1B Visas

Reform K-12 Education Long-term approach to attracting talent to math and science Market-oriented reforms for teachers

Improve Our Capital Markets “Sliding Scale” Sarb-Ox Implementation for Small Firms Steps to Ensure Research for Small Companies

Announced at NVCA Annual Meeting April 2006

NVCA Public Policy Philosophy Bi-partisan Approach

PAC Giving to Pro-Growth Members of Both Parties

$929K Given in 2006 Cycle 181 Candidates Supported

Federal Focus Cooperation with Regional Associations on

State Issues Policies that Support Capital Formation,

Company Formation and Innovation The Voice of High Growth Companies, and the

Firms That Back Them, in Members’ States and Districts Is Critical

Sarbanes-Oxley/Capital Markets Reform NVCA Board Meetings at White House Sept 14, 2006

Chief of Staff Josh Bolten Chief Economic Advisor Allan Hubbard OMB Director Rob Portman Deputy Domestic Policy Advisor Tevi Troy

Met with SEC Chairman Christopher Cox October 2, 2006

NVCA Represented on SEC Advisory Committee on Small Businesses (Ted Schlein, Kleiner Perkins)

Press Outreach and Education WSJ, NY Times, Business Week, San Jose Mercury, etc. Regional Roundtables

Sarbanes-Oxley/Capital Markets Reform

NVCA/Business Week Research on Sarb-Ox Companies with revenues between $1 million

and $5 billion (n=763) 77% SOX not improved transparency of financials 83% SOX not improved confidence in company 77% SOX not improved corporate governance 76% SOX not improved discovery of weaknesses 49% SOX diverts resources from core business

Commission on Capital Markets Reform (“The Scott Commission”) Correct Identification of the Problem

Declining competitiveness of US capital markets High cost of regulation and litigation

Correct Principles in Addressing Problems Weigh costs and benefits in regulation Better definition of “material weakness”

A “Popgun” for a Solution No fix for micro and small caps No “design only” standard No legislation recommended Weaker than SEC Advisory Committee CEOs of PWC and Deloitte were on the panel

Will the US continue as the home of the capital markets?

519

195

0

100

200

300

400

500

600

700

800

900

1,000

US Exchanges AIM*

# 2005 New Listings

$22

$186

$0

$50

$100

$150

$200

US Exchanges AIM*

2005 Average Deal Size for New Listings($ mil)

Immigration and H1-B Visas

Research on Contribution of Foreign-born Nationals to US Economy: “American Made”

National Foundation for American Policy

Released November 15, 2006 Press Coverage:

CNBC, WSJ, Bloomberg, AP, NY Times, NPR, Miami Herald, San Diego Union Tribune, etc.

Copies Provided to All Members of Congress

Highlights of “American Made” 25% of venture-backed companies which have come

public since 1990 were founded by foreign-born nationals

40% in high tech sector Includes Intel,Yahoo,Google,Yahoo,Sun,Ebay Total market cap of such companies > $500 billion 47% of responding privately-held venture-backed

startups were founded by foreign-born nationals 46% of immigrant entrepreneurs came to the U.S. as

students 69% became American citizens

Immigration: Where We Stand

Senate bill would raise H1-B cap from 65,000/yr. to 115,000/yr.

Also exempts Masters and Ph.D. students from cap

No House provision Candidate for lame duck action – now

unlikely

Declining number of H1-B visas

Source: Bureau of Consular Affairs, U.S. Department of State.

5361

7684

76

93

193

232

204208217

229

181

0

50

100

150

200

250

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

(‘000s)

R&D Funding

NVCA has supported bi-partisan authorizing legislation and “competitiveness” initiatives by both parties

Appropriations likely subject to Continuing Resolution – could be same as FY ’06

Participation in Tech Transfer Conference at BU

Education

NVCA focus has been bi-partisan legislation to increase supply of math and science teachers and offer scholarships for math and science teachers

Outreach to multiple groups across the nation: National Foundation on Teaching Entrepreneurship BUILD FIRST (For Inspiration and Recognition of Science and

Technology) New Schools

Entrepreneurship Week USA Big Ideas essay event

Legislative/Regulatory Challenges Ahead

Sarb-Ox Reform Immigration Reform Education Reform Basic Research Funding FDA and CMS Reauthorization Hedge Fund Registration/Regulation

How We Can Work Together Members Care About Job Creation in Their

States Entrepreneurs Funds

Local Press Education and Features Regional Roundtables

Role of Venture Capital in the US Economy Still Not Well Understood in Washington or in State

Capitals

www.nvca.org