1 # !@ 0302-0390915-MCL Today’s Venture Capital Environment Ted R. Woolschlager Director, Emerging Growth Markets Mid-Atlantic Area Ernst & Young June 7, 2003
Jan 03, 2016
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Today’s Venture Capital EnvironmentToday’s Venture Capital EnvironmentTed R. WoolschlagerDirector, Emerging Growth MarketsMid-Atlantic AreaErnst & YoungJune 7, 2003
Ted R. WoolschlagerDirector, Emerging Growth MarketsMid-Atlantic AreaErnst & YoungJune 7, 2003
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Tech Investing: The Good News & The Bad NewsTech Investing: The Good News & The Bad News
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Venture Capital Today:Venture Capital Today:
…The bad news:
• Public markets shut tight
• Less money being raised
• Funds being closed… A challenging environment
…The bad news:
• Public markets shut tight
• Less money being raised
• Funds being closed… A challenging environment
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Extremely Difficult Exit EnvironmentExtremely Difficult Exit Environment
• Nasdaq Down 39% 2000; 21% 2001, 33% 2002
• 2002: 19 Venture-Backed IPOs Raising $2.2BN
• 2001: 41 Venture-Backed IPOs Raising $3.5BN
• 2000: 261 Venture-Backed IPOs Raising $27.7BN
• M&A Deal Environment Quiet
• Nasdaq Down 39% 2000; 21% 2001, 33% 2002
• 2002: 19 Venture-Backed IPOs Raising $2.2BN
• 2001: 41 Venture-Backed IPOs Raising $3.5BN
• 2000: 261 Venture-Backed IPOs Raising $27.7BN
• M&A Deal Environment Quiet
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The Hangover Effect: The Math Is UglyThe Hangover Effect: The Math Is Ugly
From 1995-2000:From 1995-2000:
14,463
978
1,529
1,180
10,776
Companies funded
Went public
Were acquired
Went out of business
Remaining
Source: Venture Economics; Venture Source
--
-
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…The Good News…The Good News
• Less money chasing deals
• Bigger, more mature companies being financed
• Attractive valuations and terms
• Exit infrastructure larger since last cycle
• Hot markets continue to be PNW, MAA, NE and NY
… High returns possible at market bottoms
• Less money chasing deals
• Bigger, more mature companies being financed
• Attractive valuations and terms
• Exit infrastructure larger since last cycle
• Hot markets continue to be PNW, MAA, NE and NY
… High returns possible at market bottoms
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Funds Raised by Venture Capital Firms Q2:00 to Q2:02Funds Raised by Venture Capital Firms Q2:00 to Q2:02
30.828.9
23.4
17.4
11.7
7.14.6
1.7 1.8
0
5
10
15
20
25
30
35
2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02
30.828.9
23.4
17.4
11.7
7.14.6
1.7 1.8
0
5
10
15
20
25
30
35
2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02
$ mil
Source: PricewaterhouseCoopers / Venture Economics / National Venture Capital Association / Money Tree
• Less competition for new deals
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Am
oun
t In
vest
ed (
$ B)
Nu
mb
er of Deals
*Note: 9/30/02 Figures Annualized
Slower Investing PaceVC Equity Into Venture Backed Companies
Slower Investing PaceVC Equity Into Venture Backed Companies
$18.3
$34.1
$93.2
$49.0
$17.7$12.8$9.9$6.8
1313
1898
2169 2502
4501
6046
2985
1948
$0
$25
$50
$75
$100
1995 1996 1997 1998 1999 2000 2001 2002*
0
1,000
2,000
3,000
4,000
5,000
6,000
Amount Invested ($B) Number of Deals
$18.3
$34.1
$93.2
$49.0
$17.7$12.8$9.9$6.8
1313
1898
2169 2502
4501
6046
2985
1948
$0
$25
$50
$75
$100
1995 1996 1997 1998 1999 2000 2001 2002*
0
1,000
2,000
3,000
4,000
5,000
6,000
Amount Invested ($B) Number of Deals
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Am
oun
t In
vest
ed (
$B) N
um
ber of D
eals“First Sequence” Financings: Q1 1995 – 2002 YTD“First Sequence” Financings: Q1 1995 – 2002 YTD
$0.8$1.0$0.9$0.8$1.1$1.2
$0.8$1.2$1.1$1.3$1.2
$1.8$1.5
$1.9$1.7$2.1
$3.1
$3.7
$7.2
$8.8$8.7
$6.2
$5.5
$3.0
$1.8$1.3$1.3$1.3$1.2$1.0
$2.1
258210 220 214
244299
254
353 338297 302
375
724
353 345394
367
559
654
879
941 956
803
654
372
313
255227
197 214
159
$0.0$1.0$2.0$3.0$4.0$5.0$6.0$7.0$8.0$9.0
$10.0
Q195
Q395
Q196
Q396
Q197
Q397
Q198
Q398
Q199
Q399
Q100
Q300
Q101
Q301
Q102
Q302
0
100
200
300
400
500
600
700
800
900
1,000
Amount Invested ($B) Number of Deals
$0.8$1.0$0.9$0.8$1.1$1.2
$0.8$1.2$1.1$1.3$1.2
$1.8$1.5
$1.9$1.7$2.1
$3.1
$3.7
$7.2
$8.8$8.7
$6.2
$5.5
$3.0
$1.8$1.3$1.3$1.3$1.2$1.0
$2.1
258210 220 214
244299
254
353 338297 302
375
724
353 345394
367
559
654
879
941 956
803
654
372
313
255227
197 214
159
$0.0$1.0$2.0$3.0$4.0$5.0$6.0$7.0$8.0$9.0
$10.0
Q195
Q395
Q196
Q396
Q197
Q397
Q198
Q398
Q199
Q399
Q100
Q300
Q101
Q301
Q102
Q302
0
100
200
300
400
500
600
700
800
900
1,000
Amount Invested ($B) Number of Deals
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Median Valuations of Venture Rounds Q1:00 to Q2:02Median Valuations of Venture Rounds Q1:00 to Q2:02
Median Pre
money Valuation
($ mil)
Source: VentureOne
• Valuations down 61.4% in 8 quarters
“Venture valuations Go Back to Levels of Mid-1990s” -The Wall St. Journal, August 28, 2002
$25.9
$24.0$25.4
$21.8
$17.8$17.0
$13.4
$15.9
$10.0$11.1
$9
$19
$29
1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02
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Attractive ValuationsAttractive Valuations
Median Valuations of Venture-backed Companies Q1:00 vs. Q2:02$ in millions
Round
Seed
First
Second
Later
Q1:00
$5.30
$13.00
$39.00
$100.00
Q2:02
$3.00
$7.00
$12.00
$24.00
Change
-43%
-46%
-69%
-76%
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Venture Capital Has Always Been a Cyclical BusinessVenture Capital Has Always Been a Cyclical BusinessLate 80’s / Early 90’s:• # VC Funds 1985: 850
• # VC Funds 1991: 450
• # IPOs 1986: 377
• # IPOs 1989: 63
• # Co’s Backed 1987: 523
• # Co’s Backed 1991: 237
…AND YET:
• Cisco: 1st VC Funding: 1987IPO: 1990
• AOL: 1st VC Funding: 1986IPO: 1992
• UUNet: 1st VC Funding: 1990IPO: 1995Sale: 1996
Late 80’s / Early 90’s:• # VC Funds 1985: 850
• # VC Funds 1991: 450
• # IPOs 1986: 377
• # IPOs 1989: 63
• # Co’s Backed 1987: 523
• # Co’s Backed 1991: 237
…AND YET:
• Cisco: 1st VC Funding: 1987IPO: 1990
• AOL: 1st VC Funding: 1986IPO: 1992
• UUNet: 1st VC Funding: 1990IPO: 1995Sale: 1996
Mid 70’s:• $ Committed to VC 1974: $ 380
mil
• $ Committed to VC 1977: $ 62 mil
• # IPOs 1972: 75
• # IPOs 1975: 2
…AND YET:
• Apple: 1st VC Funding: 1977IPO: 1980
• MSFT: 1st VC Funding: 1976IPO: 1986
• Symbol: 1st VC Funding: 1975IPO: 1979
Mid 70’s:• $ Committed to VC 1974: $ 380
mil
• $ Committed to VC 1977: $ 62 mil
• # IPOs 1972: 75
• # IPOs 1975: 2
…AND YET:
• Apple: 1st VC Funding: 1977IPO: 1980
• MSFT: 1st VC Funding: 1976IPO: 1986
• Symbol: 1st VC Funding: 1975IPO: 1979
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Huge Growth of Venture-Backed Companies -- Through Every CycleHuge Growth of Venture-Backed Companies -- Through Every Cycle
Significant economic impact:
• 12.5 mil direct jobs
• 27 mil direct and indirect jobs
• $ 1.1 tril in GDP
• 11% of US GDP
• $ 157 bil in R&D investment
• Huge leverage to capital invested
Significant economic impact:
• 12.5 mil direct jobs
• 27 mil direct and indirect jobs
• $ 1.1 tril in GDP
• 11% of US GDP
• $ 157 bil in R&D investment
• Huge leverage to capital invested
Source: DRI-WEFA Study; NVCA
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Venture Has Outperformed Other Asset Classes in the Medium and Long RunVenture Has Outperformed Other Asset Classes in the Medium and Long Run
Returns (%)
Fund Type 1 Yr 3 Yr 5 Yr 10 Yr 20 Yr
All Venture (23.8) 41.1 34.9 25.9 17.3
All Buyouts (9.6) (0.1) 4.9 10.7 14.2
Nasdaq (33.8) (22.2) (5.2) 8.3 10.2
Dow (15.9) (8.0) 1.2 9.7 11.8
S&P (22.2) (12.2) (1.1) 7.8 10.6
Source: NVCA / Venture Economics
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A Success Story- BlackboardA Success Story- Blackboard
• Blackboard Inc.
• Software- eLearning
• Raised over $100 million
• Both VC and strategic investments
• Survived the “bubble”
• Revenue of approx. $70 million, cash flow positive
• Blackboard Inc.
• Software- eLearning
• Raised over $100 million
• Both VC and strategic investments
• Survived the “bubble”
• Revenue of approx. $70 million, cash flow positive
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Focus on BiotechnologyFocus on Biotechnology
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Global Biotech at a glanceGlobal Biotech at a glance
Key metricsKey metrics
Revenue ($m)Revenue ($m)
R&D expense ($m)R&D expense ($m)
Net loss ($m)Net loss ($m)
Number of employeesNumber of employees
$34,874$34,874
$16,427$16,427
$(5,933)$(5,933)
188,703188,703
Number of companiesNumber of companies
Public companiesPublic companies
Private companiesPrivate companies
TotalTotal
622622
3,6623,662
4,2844,284
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Biotechnology is a global industry . . .
Biotechnology is a global industry . . .
85 / 41685 / 416
CanadaCanada
342 / 1,457342 / 1,457
U.S.U.S.
104 / 1,879104 / 1,879
EuropeEurope91 / 53291 / 532
Asia/PacificAsia/Pacific
Distribution of public/total biotechnology companies driving the
emergence of centers of excellence.
Distribution of public/total biotechnology companies driving the
emergence of centers of excellence.
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. . . and is concentrated in the U.S. and Europe. . . and is concentrated in the U.S. and Europe
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Countries we covered
79%
Countries we covered
79%Others21%
Others21%
Global GDPGlobal GDP Share of global biotechnology revenues
(Public companies)
Share of global biotechnology revenues
(Public companies)
U.S.72%U.S.72%
Europe22%
Europe22%
Canada 3%Canada 3%
Asia/Pacific 3%Asia/Pacific 3%
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Major findingsMajor findings
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EuropeEurope
U.S.U.S.
CanadaCanada
Asia/PacificAsia/Pacific
Record-LevelVenture Fundings and
Drug Approvals
Rapid Growth2nd Largest Concentration
of Biotech Companies
12th Consecutive Year Of Revenue Increase
Emerging Biotech Player
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Partnering Across BordersPartnering Across Borders
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CanadaCanada
U.S.U.S. EuropeEurope
Asia/PacificAsia/Pacific
Mature marketShort term
earnings boost
Pharma seeking new technology
Biotechseeking global development and capital
Source: Ernst and Young Beyond Borders Report 2002
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ConclusionsConclusions
• Technology Is Not Dead, “It’s Just Resting” – Still the Source of Major Productivity Gains
• Absolute Returns Will (of course) Be Lower But Deals Must Be Priced to Outperform
• Longer Exit Horizon Puts Focus on Business Partnership
• Emphasis on Who Can Help Build Companies
• Technology Is Not Dead, “It’s Just Resting” – Still the Source of Major Productivity Gains
• Absolute Returns Will (of course) Be Lower But Deals Must Be Priced to Outperform
• Longer Exit Horizon Puts Focus on Business Partnership
• Emphasis on Who Can Help Build Companies
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Conclusions:Conclusions:
1. Now is a good time to invest -- valuations are low, terms are good (for the buyer)
2. The pace of innovation continues -- growth will return, and historically the most money has been made investing at cyclical bottoms
3. Private equity is institutionalizing – a handful of brands will emerge; standards will be the norm
1. Now is a good time to invest -- valuations are low, terms are good (for the buyer)
2. The pace of innovation continues -- growth will return, and historically the most money has been made investing at cyclical bottoms
3. Private equity is institutionalizing – a handful of brands will emerge; standards will be the norm
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Thank YouThank You