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It’s morning in VC Disruption in our industry. What does it mean for VCs & LPs?
52

Why It's Morning in Venture Capital

Aug 11, 2014

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Investor Relations

Mark Suster

 
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Page 1: Why It's Morning in Venture Capital

It’s morning in VC •  Disruption in our industry.

•  What does it mean for VCs & LPs?

Page 2: Why It's Morning in Venture Capital

2

Critics of venture capital returns fall prey to rearview mirror analysis

Page 3: Why It's Morning in Venture Capital

Let’s start with some facts that everybody knows

3

Page 4: Why It's Morning in Venture Capital

1 The dot-com boom caused too much LP money to come into VC

Source: Prequin. Includes all LP investment into US VC funds with IT & Digital Media focus. Excludes funds with hardware & nanotech focus, non-$USD funds, funds with undisclosed amounts, & funds without first close 4

$3 $5 $7

$12

$31

$50

$26

$8 $6

$13

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Commitments from LPs to U.S. Tech VC funds ($B)

Page 5: Why It's Morning in Venture Capital

This in turn caused too many VCs to enter the market

Source: Prequin. Includes all LP investment into US VC funds with IT & Digital Media focus. Excludes funds with hardware & nanotech focus, non-$USD funds, funds with undisclosed amounts, & funds without first close 5

33 38

66 77

109

163

90

67

49

68

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

No. of funds raised by U.S. Tech VC firms

2

Page 6: Why It's Morning in Venture Capital

As a result, the startup ecosystem became over-capitalized

Source: PWC/NVCA MoneyTree Report 6

$250 $550 $628 $1,435

$7,465

$11,232

$1,150 $328 $400 $482

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

First institutional money raised by Internet Co's ($M)

3

Page 7: Why It's Morning in Venture Capital

1997 1998 1999 2000 2001 2002 2003 2004

Exit values of VC backed co's ($Bn)

M&A trade sales IPOs

1997 1998 1999 2000 2001 2002 2003 2004

No. of VC backed co. exits

M&A trade sales IPOs

The over-investment was followed by a period of greatly reduced exits

Source: Thomson Reuters 7

$42 $27

$178

$142

$40 $32 $38

$92 273 268

611 537

404 392 369

503

4

Page 8: Why It's Morning in Venture Capital

The math is simple …

8

LP money

# of VCs

Exits (#, value)

VC fundings (deals, size, value)

Poor performing asset class 1999-2007 DUH. =

Page 9: Why It's Morning in Venture Capital

And as we know, the hangover from this over-investment lasted a decade

9

Page 10: Why It's Morning in Venture Capital

Will the road ahead be the same? Let’s look at the facts …

10

Page 11: Why It's Morning in Venture Capital

There are 50x more Internet users today (33% of world population)

Sources: U.S. Bureau of the Census, World Bank. As of Q2 June 2012. 11

44

411

1,019

2,019

2,406

1995 2000 2005 2010 2012

World Internet users (M)

1

Page 12: Why It's Morning in Venture Capital

NOW 1995

Online speeds are over 180x faster

Source: Akamai ‘s State of the Internet Q1 2014 12

56 Kbps modems

10.5 Mbps average U.S.

Internet connection

speed!

2

Page 13: Why It's Morning in Venture Capital

People are mobile: connected everywhere, all the time

Source: 2014 Statista forecasts 13

•  Personal

•  Location aware

•  At point of purchase

US smartphone users

164m Up 13.4% from 2013

US tablet users

119m Up 20.5% from 2013

3

Page 14: Why It's Morning in Venture Capital

Everybody is socially connected driving viral growth at faster rates

14

Monthly active users 255M

Monthly active users 1.3B+

Global registered members 300M+

Hours of video watched each month by 1B+ users 6B+

4

Page 15: Why It's Morning in Venture Capital

We all have credit cards on file with a single click to purchase

Sources: eMarketer, WSJ 15

Global ecommerce spend $1.5 trillion 1 billion

Digital shoppers worldwide

The Apple app ecosystem alone estimated to be $35 billion in 2014 (from $0 in 2008)

5

Page 16: Why It's Morning in Venture Capital

•  Education (remote learning)

•  Healthcare (doc on demand)

•  Defense (drones)

Economic pressures + improved telepresence will transform industries such as …

16

6

Page 17: Why It's Morning in Venture Capital

Industry right sized to pre dot-com levels

Source: Prequin. Includes all LP investment into US VC funds with IT & Digital Media focus. Excludes funds with hardware & nanotech focus, non-$USD funds, funds with undisclosed amounts, & funds without first close 17

$3

$50

$16

$9

$16

1995 2000 2005 2010 2012

Commitments from LPs to U.S. Tech VC funds ($B)

33

163

74

50 65

1995 2000 2005 2010 2012

No. of funds raised by U.S. Tech VC firms

7

Page 18: Why It's Morning in Venture Capital

In fact, FLAG Capital estimates the number of active tech VCs is less than 100

Source: Thomson Venture Economics, NVCA Yearbook 2013, FLAG internal analysis 18

441

119

75 86

2000 2005 2010 2012

Number of active U.S. VC firms

Via FLAG Capital - “active” defined as making at least $1 million in venture investments per quarter for 4 quarters in a given year

Page 19: Why It's Morning in Venture Capital

If Anything:

It’s Morning in Venture Capital

19

Page 20: Why It's Morning in Venture Capital

Think about it …

20

50x users, 180x bandwidth, 6x time spent online

Mobile, social, credit-card ready

LP money, active VCs

Global economic pressure

Amazing opportunity set for VC for 2010-2020 DUH. =

Page 21: Why It's Morning in Venture Capital

But our industry has clearly changed.

VCs (and LPs) can’t be complacent.

21

Page 22: Why It's Morning in Venture Capital

Entrepreneurs need less capital to start a company

22

$5m

$500k

$50k $5k

1995 2005 2010 2014

Technology Drivers

Open Source

Cloud + AWS

Developers Start Companies

99% reduction

1

Page 23: Why It's Morning in Venture Capital

•  Angels

•  Incubators / Accelerators

•  Seed funds

•  VCs

•  Crowdsourcing

With less $$ required there are many more sources from which to raise money

23

2

Page 24: Why It's Morning in Venture Capital

Entrepreneurs expect much more transparency

24

Fred Wilson AVC

Chris Dixon Chris Dixon

Brad Feld Feld Thoughts

Mark Suster Both Sides of the Table

Ben Horowitz ben‘s blog

Josh Kopelman Redeye VC

Bryce Roberts Bryce Dot VC

Jeff Bussgang Seeing Both

Sides

Bill Gurley Above the

Crowd

Manu Kumar K9 Ventures

3

Page 25: Why It's Morning in Venture Capital

How important is blogging / transparency? 52% say critical to VC decision. 96% prefer it

Source: Upfront Ventures Survey data 25

96%

52%

44%

4%

Essential or important Nice to have Negative, not wanted

Page 26: Why It's Morning in Venture Capital

•  Servers

•  Routers

The plumbing & infrastructure phase was & is dominated by Silicon Valley

26

•  Switches

•  Databases

•  Browsers

•  Search

4

Page 27: Why It's Morning in Venture Capital

But increasingly there have been regional successes in monetizing the web at a higher layer (the three C’s)

27

•  Content •  Commerce •  Communications

4

Page 28: Why It's Morning in Venture Capital

Not surprisingly some of the best performing new funds are not from traditional strongholds

28

Page 29: Why It's Morning in Venture Capital

Seed Stage

Early Stage

Later Stage

The LP market (led by Cendana Capital) has started to recognize the value of the seed stage VC market

29

$50M $150-300M $500M+

Many Great Emerging VC Funds

5

Page 30: Why It's Morning in Venture Capital

But LP money has largely becoming concentrated in Growth VC funds (> $500m)

*Q1 2014. Source; Q2 2014 PitchBook US Venture Industry Data Sheet 30

5

39% 35% 43%

67% 59%

26%

66%

2008 2009 2010 2011 2012 2013 2014*

Share of VC $ funds raised > $500M

Represents only 8% of total funds raised

Page 31: Why It's Morning in Venture Capital

This bifurcation has led to a gap in the traditional VC A/B round market

31

Seed Stage

Early Stage

Later Stage

$50M $150-300M $500M+

Market Gap

5

Page 32: Why It's Morning in Venture Capital

Yet in the past 30 years, Traditional Early-Stage VC has out-performed other stages 2/3 of the time

Source: Cambridge Associates Includes: data from 1,470 funds from 1981-2012 32

9%

25%

66%

Multi-stage

Late-stage

Early-stage

VC Annual Fund Performance

Page 33: Why It's Morning in Venture Capital

Big market shifts: the VC industry is changing

33

Funding sources

Transparency / operation experience

New competitive dynamics in VC =

Capital to start, age of founders

Regional successes (tech & VC)

Concentration of LPs in “mega-funds”

Page 34: Why It's Morning in Venture Capital

How are modern VCs differentiating?

Providing more value.

34

Page 35: Why It's Morning in Venture Capital

Entrepreneurs want thought leadership as well as operational experience

Source: Upfront Ventures Survey data 35

Important or very important when choosing a VC

34%

47%

49%

52%

60%

67%

68%

70%

70%

87%

87%

Location

Name / firm achievement

Access to portfolio network

Transparency (blog or public voice / opinion)

Recruiting support

Ability to help with access to customers

M&A support

Ability to attract other VCs

Ability to help with marketing your company

Industry experience / thought leadership

Operational experience

Less Important

1

Page 36: Why It's Morning in Venture Capital

36

Seller Buyer

•  Distributors

•  Physical locations

•  Brokers Cutting Out

VCs encourage all of their portfolio companies to “go direct” to consumers

Page 37: Why It's Morning in Venture Capital

•  Blogging •  Social media •  Video •  Teaching

Modern VCs have used the same “direct to customer” tools for competitive advantage

37

Direct to our customer (entrepreneurs)

Thought leadership > old boys club

More effective for volume

2

Page 38: Why It's Morning in Venture Capital

•  Boards meet 6-8 times per year

•  Mentor, decide key issues & replace CEO if necessary

•  While boards play a vital role, it’s clear they can’t solve all problems

The old VC model relied mostly on “VC knows best” & board interaction

38

Page 39: Why It's Morning in Venture Capital

•  More time

•  Closer in skills

•  Recent methods

We know that kids learn much better from peers than parents

39

Page 40: Why It's Morning in Venture Capital

•  CEO summits

•  Expert universities

•  Business support

•  Tools

•  Incentives

New VC “platforms” recognize the importance of peer learning, participation

40

Some Best in Class Platforms

3

Page 41: Why It's Morning in Venture Capital

•  CEO & CTO summits •  Market research / internship projects •  Stock swaps •  Content library •  Easy access to “Second Round Capital” 41

Page 42: Why It's Morning in Venture Capital

42

•  CEO workshops

•  University style hands-on learning from key industry figures

•  Video sessions for further use

Page 43: Why It's Morning in Venture Capital

43

Leading funds putting big investments into operational support staff

Some Best in Class Services

4

Page 44: Why It's Morning in Venture Capital

In-house tools & resources

•  Recruiting

•  PR

•  Designers, engineers & execs

•  Business development 44

Page 45: Why It's Morning in Venture Capital

•  Hands-on support teams for design, recruiting, marketing & engineering

•  Startup Lab workshops

•  Events / networking conferences 45

Page 46: Why It's Morning in Venture Capital

46

•  Accounting Services

•  Education

•  Blogging / Marketing Services

•  Inside Sales

•  Recruiting

•  Market Research

Example Services Provided

Page 47: Why It's Morning in Venture Capital

47

One of most important differentiators is domain knowledge & providing industry access for deals

Some Best in Class Industry Networks

5

Page 48: Why It's Morning in Venture Capital

•  Best domain knowledge & relationships in ad sector

•  CEO summits with key industry players

•  Ad Agency Days where portfolio presents to buyers of Ad Tech 48

Page 49: Why It's Morning in Venture Capital

•  Holds “Future of TV” summits with key industry leaders

•  Blog & provide thought leadership on: Online Video, Ad Tech, Mobile & SaaS

•  Strategic LPs / Portfolio meetings 49

Page 50: Why It's Morning in Venture Capital

•  Took an early market position on “big data” (IA = information arbitrage)

•  Deep financial services relationships / knowledge

•  Executive relations at financial data companies like Reuters, Bloomberg 50

Page 51: Why It's Morning in Venture Capital

In summary: The market expects more than money. VCs can’t be stock pickers. They must invest in platforms not their pocketbooks.

51

Operational experience

Thought leadership & transparency

Peer-to-Peer platforms

Operational support on recruiting, accounting, biz dev, design

Industry insights / relationships

Page 52: Why It's Morning in Venture Capital

We’re inspired by what we see our colleagues in the industry doing. We believe … Thank You

It’s Morning in Venture Capital