Venture Capital in the US: “A machine for business building” Mikko Suonenlahti, Partner, 3i March 22, 2004 [email protected].

Venture Capital in the US:

“A machine for business building”

Mikko Suonenlahti, Partner, 3iMarch 22, 2004 [email protected]

Predominantly a US Phenomenon

Non U.S. (28%)

Massachusetts (16%)

California (40%)

U.S. (72%)

Investments by State 100% = $21.2B

Source: PWC MoneyTree Survey

Global Venture Capital Market – 2002100% = $29.4B

A machine for business building

Other

(44%)

NB. Corporate R&D in G7 countries was $442B in 1999

The European Perspective of Venture CapitalQ3 - 2003

A machine for business building

16%

9%

11%

18%

46% UK

Germany

France

Sweden

Other

100 %

Source: Venture Source

U.S. venture capital activity: Total equity investments into venture-backed companies

99.6

52.4

36.5

21.219.214.49.65.1

12

0102030405060708090

100

1995 1996 1997 1998 1999 2000 2001 2002 2003Est.

Bil

lio

ns

of

$ in

vest

ed

Source: PWC MoneyTree Survey, 3i

A machine for business building

Free market mantra:

•Telecom•Financial

Technology Advances:

•Internet•Y2K

Financial Returns*

A machine for business building

1 YR 5 YR 20 YR

S&P 500 -2% -3% 12%

All Private Equity -7% 6% 14%

-- Buyouts 3% 6% 12%

-- Early Stage Venture Capital -26% 48% 20%

*As of June 30, 2003

Source: NVCA

The US Venture Industry

A machine for business building

#VC Firms

Capital Under Management $’s Billion

Average CapitalPer Firm

1970 28 1 $35

1980 87 3 $34

1990 386 32 $82

2002 892 253 $283

200X est. 500 150 $300

Source: NVCA

Venture Capital in the US

Venture funded firms account for:

12.5 million employees, 11% of US payroll

1.1 trillion in annual revenues, 11% of US GDP

More Federal taxes per $1,000 in assets than their peers – paid $58.8 billion of Federal taxes and $7.8 billion in state and local taxes

More sales per $1,000 in assets than their peers

$13.8 billion of net income, $21.7 billion of exports and invested $157.3 billion in R&D

A machine for business building

Source: NVCA

Venture Capital in MassachusettsA machine for business building

• 9 major Universities:MIT, Harvard, Boston University

• World’s highest patents per capita ratio

• Route 128: America’s Technology Highway 1970’s and 1980’s

• >30,000 hi-tech firms

• 41 early stage VC backed spin-offs from DEC alone

• 688,000 jobs in VC backed companies – 23% of Massachusetts workforce

• VC backed businesses generated $47B of revenues in 2002

• Many serial entrepreneurs have been backed by VC’s since the 1960’s

• Q1 2003 investments in 77 VC deals at $655MM

• Winter Street, Waltham, is the world’s second largest concentration of venture capital with >$1B of investments per year

• Receives 60% of Defense R&D $’s

• Today 113 VC backed public companies with market cap > $100MM

• Several multibillion dollar market cap VC backed public companies – includes 3i US legacy investments

Technology Hot Bed

Seasoned Management Teams

Availability of Financing

Liquidity

A machine for business building

Venture backed IT businesses in New England 1970 – 2000

Prime First 32-bit computers. Funded by Greylock in 1974. IPO in 1974.

Apollo Funded by Greylock in 1980. First computer to use integrated circuits developed at MIT. IPO in 1983 Acquired by HP in 1989 for $476MM.

Data General Funded by Greylock in 1980. IPO in 1983. Acquired by EMC for $1.1B in 1999.

Lotus Acquired by IBM in 1995 for $3.5B.

DEC Acquired by Compaq for $9.6B in 1998.

3i US Venture Capital investments which have gone public* - a selection of 29 IPO’s: Idec - cancer drugs, $5.6B

LSI Logic – custom semiconductors, systems on a single chip, $3.0B

Amylin Pharma – diabetes drugs, $2.1B

Dura Pharma – asthma drugs. Elan acquires for $1.7B

Medisense – diabetes monitoring systems. Abbott acquires for $0.8B

RSA Security – identity management solutions, $0.6B

Biopure – oxygen therapeutics, $0.2B

Transwitch – VLSI solutions for global communications equipment supplies, $0.1B

A machine for business building

*Market caps July, 2003, for 3i US legacy business investments

A machine for business building

Venture backed IT businesses which are publicly quoted in New England in 2003*

Akamai First financing round of $8.2MM in 1998. Investors Battery and Polaris. IPO value $2.4B. Market cap $653MM, peaked at $18B.

Analog Devices Market cap $12.8B.

Parametric Technologies

First financing round of $3.7MM in 1987. IPO value $90MM, market cap $944MM.

Sonus First financing round 1997. Investors Castile, Charles River, Matrix, Northbridge. IPO value $1.5B, market cap $1.1B.

Sycamore First financing round of $5.5MM in 1998. Investors Matrix, Northbridge. IPO value $3.2B, market cap $1.1B.

*Market caps June, 2003

A machine for business building

A Model for investing• $30 - 50 Million in VC Funding• 2 - 4 Financing Rounds• Target $120 - 150 Million liquidity event*

A machine for business building

*Sweet spot of M&A market is $20-100MM in July, 2003

US Venture Capital - Q1 2003

A machine for business building

Source: Money Tree, 3i Analysis

# Deals $’s InvestedAverage

Round Size

California 239$1.6 B

$6.7 MM

New England 77 $655 M $8.7 MM

Other 326 $1.7 B $5.3 MM

642 $4.0 B

Venture Capital in 2002*

Market Size ($Billions)

19.4

11.0

1.8

0.3

$0 $5 $10 $15 $20 $25

US

Europe

Canada

Finland

A machine for business building

*Technology Only

Source: NVCA, EVCA, CVCA, FVCA, 3i analysis

Venture Capital in 2002*Number of Financing Rounds

2056

8684

677

433

0 2000 4000 6000 8000 10000

US

Europe

Canada

Finland

A machine for business building

*Technology Only

Source: NVCA, EVCA, CVCA, FVCA, 3i analysis

Average Per Round($Millions)

$0.6M

$2.6M

$1.2M

$6.5M

$0 $1 $2 $3 $4 $5 $6 $7

US

Europe

Canada

Finland

Venture Capital in 2002*

A machine for business building

*Technology Only

Source: NVCA, EVCA, CVCA, FVCA, 3i analysis

A machine for business building

Christopher Columbus was the first to explore uncharted seas to the West – backed by venture capital – and options.

A crew of 87 experienced seamen accompanied Christopher on the Nina, Pinta, and Santa Maria

Attitude towards risk – 14,000 venture backed companies

A machine for business building

• 20% find a safe harbour

• 10% shipwrecks

NVCA Long Term Public Policy Agenda1. Access to Capital and Liquidity

Tax policy favoring capital formation Open, fair and vibrant capital markets Increased basic R&D Funding

2. Enhanced Human Resources Open immigration policies Aggressive adult and youth education policies Broad use of options for all employees

A machine for business building

NVCA Public Policy Agenda 2003 Capital gains reduced from 20% to 15%

Oppose mandatory expensing of options, encourage transparency

Prevent payroll taxes on options

Ensure corporate governance roles (Sarbanes-Oxley), continue to allow for full VC participation in private and public companies

Work with SEC to reform IPO process

Broadband deployment

Etc.

A machine for business building

NVCA in the 1970’s

Persuaded Congress to reduce capital gains taxes.

Removed barriers to pension fund investing in venture capital as an asset class.

A machine for business building