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The Economic Impact of Venture Capital

Return on Investment:. The Economic Impact of Venture Capital. Prepared for the Minneapolis Foundation April 29, 2004. Pre Investment. Post Investment. Control. No Control. The Venture Capitalist Dilemma Grid. Pre Investment. Post Investment. Control. No Control.

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The Economic Impact of Venture Capital

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  1. Return on Investment: The Economic Impact of Venture Capital Prepared for the Minneapolis Foundation April 29, 2004

  2. Pre Investment Post Investment Control No Control The Venture Capitalist Dilemma Grid

  3. Pre Investment Post Investment Control No Control Pre Investment / Control

  4. Pre Investment Post Investment Control No Control Post Investment / Control

  5. Pre Investment Post Investment Control No Control Pre Investment / No Control

  6. Pre Investment Post Investment Control No Control Post Investment / No Control

  7. Model VC Portfolio • $6 million commitment • $18.2 million in distributed capital • 30% IRR

  8. Agenda • Sherpa Partners • Venture Capital as an Economic Engine • Venture Capital Industry • Regional Venture Capital • Minnesota Highlights • FAQs about Venture Capital

  9. “…Americans created the phrase ‘to make money.’ No other language or nation had ever used these words before... Americans were the first to understand that wealth has to be created.”Ayn Rand (1905-1982)Russian-American philosopher

  10. The Term Sherpa “Sherpa” refers to both an ethnic group and a job description as porter, climb or trek leader found in the mountains of Eastern Tibet.

  11. Sherpa Partners, LLC Venture capital firm focused on early-stage companies primarily located in the Upper Midwest

  12. Sherpa PartnersTogether Since 1998 Co-Managers Mac Lewis, Steve Pederson and Rick Brimacomb have a proven track record as entrepreneurs, operating managers, value-added investors, and directors. Collectively, they have about 50 years of operating experience and 30 years of investment experience.

  13. Equity Financing Food Chain (Founder to Angel to Institutional Investors) Late Stage Late Majority Customers Expansion Stage Early Majority Customers Early Stage – (Sherpa) Early Adopter Customers Seed Stage Innovation Customers Angels Public Market Friends & Family Institutional - VCs

  14. Venture Capital as an Economic Engine

  15. Venture Capital Impact on the US Economy • Venture funded firms account for: • 12.5 million jobs • Annual revenues of $1.1 Trillion • Impact on economy • 6.7% of US company revenue • 9.7% of US payroll • 11.0% of US GDP Source: National Venture Capital Association and DRI-WEFA

  16. Job Creation 1 job per $3,000 invested in venture capital Source: National Venture Capital Association

  17. Venture Capital CreatingJobs in Minnesota • 356,000 new jobs in Minnesota at companies with $27.5B in Revenue • Sherpa’s seven companies created 258 jobs in Minnesota and surrounding states. Source: National Venture Capital Association and DRI-WEFA

  18. Where is the Employment Growth? • Obsolete jobs will be “outsourced.” • U.S. economy will continue to gain in the service sector. • Venture Capitalists and Entrepreneurs start companies to create new jobs. Source: Economic Report of the President, 2004

  19. Venture Capital Industry

  20. “…both initial and secondary offerings have soared from a year ago.” “…share prices increase an avg. of 16.4% in the first week… That’s good, but it’s well below the 82%, 1-week gain… enjoyed in 2000.” Local Underwriters Jump on IPO ComebackStar Tribune 4/26/04

  21. “…slowest quarter in terms of deals since 1995…” “…the largest quarterly dollar amount in two years.” Venture Capital Slows to a TrickleStar Tribune 4/27/04

  22. VC According to the Star Tribune Venture Capital Slows to a Trickle Star Tribune 4/27/04 VC Awaits an IV Star Tribune 1/27/04 Coming Up Short in Biotech – VC Investment in MN Keeps Falling Star Tribune 10/28/2003

  23. Venture Capital Investments($ in 000s) Source: Thomson Venture Economics

  24. Steady Growth Venture Capital Investments($ in 000s) Source: Thomson Venture Economics

  25. Uninvested Venture Capital“Dry powder” near all-time highs $86B According to McKinsey & Co. 3/04 $55B Source: SVB Estimates & Venture Economics

  26. Regional Venture Capital

  27. Midwest Venture Capital Industry Dollar Amount of Invested Capital

  28. Midwest Venture Capital Industry Number of Deals – Deal Flow

  29. Minnesota Highlights

  30. That you know someone who works for a venture backed company! Odds are better than one in ten! MN employs 2,700,000 residents. Of that, 12.9% or 356,000 were created by venture backed companies. Chances Are… Source: PWC Money Tree, Minnesota Workforce Center

  31. MN’s Large Fortune 500 Companies 3M - $65 B Medtronic - $62 B Target Corporation - $40 B UnitedHealth Group - $40 B General Mills - $18 B Best Buy - $17 B Supervalu - $4 B MN’s Large Technology Companies Veritas Software Corp - $11.8 B Retek Inc. - $415 M Computer Network Technology - $200 M Rimage Corp - $150 M Analysts International Corp - $70 M Hometown Start-Up Success Stories *All of these MN companies are public and trade on either the NYSE or the NASDAQ. Their respective market capitalization are as of April, 2004.

  32. Medtronic Then • Founded in 1949 by Earl Bakken and Palmer Hermundslie in Earl’s garage. • Started repairing hospital equipment before turning into an innovative medical device manufacturer.

  33. Medtronic Now • Employer of +30,000 worldwide and generates +$7 billion in annual revenue. • Consistently voted one of the nation’s best employers. • Cornerstone of Medical Device Community.

  34. Control Data Then • Founded in 1957 by William Norris, Seymour Cray and 11 others from Sperry Rand Univac • Started selling drum memory products before selling first computer in 1959 – first computer built primarily with transistors.

  35. Control Data Now • 1957 Control Data • 1972 Cray Research • 1996 Silicon Graphics • 2000 Cray • 2002 Unlimited Scale • Sherpa invests $500k • 2003 Cassatt • $30M from Warburg Pincus • Bill Coleman becomes CEO (Co-founder of BEA Systems: BEAS - NASDAQ NM)

  36. MN 8th in High-Tech States Source: Milken Institute, 2004

  37. MN 8th in High-Tech States Source: Milken Institute, 2004

  38. Reasons MN is a World-Class Competitor 10. Proven Performance - Ranked ninth in major corporate expansions in 2001 and made the top five list for development capacity and business vitality. 9. High-Tech Industries - One of the top 10 states for creating high-tech jobs. 8. Robust and Diverse Economy - Minnesota's economy grew 43.3 percent in the 1990s, while the nation's economy grew just 34.7 percent. 7. Skilled and Educated Workforce - Nearly 91 percent of Minnesotans have a high school diploma (third in the nation) and 31 percent have earned bachelor's degrees (seventh). 6. Education Breeds Investment Ideas - Ranking fourth in the number of companies spun off from its discoveries, the University of Minnesota not only provides skilled workers, but also contributes to the state's economy. Source: Department of Trade and Economic Development

  39. Reasons MN is a World-Class Competitor 5. Reliability and Affordability – Affordable utilities, and commercial are competitive with those of other major cities . 4. Transportation Links– MSP International Airport, a portal to the world, offers non-stop flights to 130 U.S. cities, 23 to Canada, Latin America, Europe, and Asia. 3. Technology – Ranked 8th in High-Tech States in the 2004 Milken Institute study. 2. Venture Capital - A 2001 study by the National Venture Capital Association ranked Minnesota 11th in jobs created by companies originally backed by venture capital, and the second fastest-growing state for venture capital investment between 1996 and 2001. 1. Quality of Life - Minnesota's cultural attractions, outdoor recreation and scenic landscape appeal to both residents and visitors. And for many years, Minnesota has topped Morgan Quitno's "Most Livable State" rankings. Source: Department of Trade and Economic Development

  40. Deal Flow - National vs. Local • When Venture Capital deal flow fell on a national level, Minnesota’s deal flow increased! Source: PWC Money Tree

  41. In 2002 and 2003, Minnesota Venture Capitalists invested $540 million in 114 deals. Average investment per deal = $4.7 million. Venture Impact in Minnesota Source: PWC Money Tree, Minnesota Workforce Center

  42. Liquidity through IPOs • Since 1993, Minnesota Venture Backed Companies have raised $1.5 billion in IPO financing. • The aggregated market capitalization of these companies (count 40) is $8.0 billion. Source: Venture Economics/NVCA

  43. FAQs about Venture Capital

  44. Is Minnesota Fly-Over Land? • Workforce • Stable, educated and high-tech • Higher Education • Research dollars and MBA programs • Large Companies • Fortune 500

  45. How do I Attract Venture Capital? www.sherpapartners.com

  46. How do I Invest in Venture Capital? www.sherpapartners.com

  47. Sherpa Partners, LLC5050 Lincoln Drive - Suite 490Minneapolis, MN 55436 Rick Brimacombwww.sherpapartners.comDirect: 952-942-1074Main: 952.942.1070

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