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Today’s Venture Capital Environment

Today’s Venture Capital Environment. Ted R. Woolschlager Director, Emerging Growth Markets Mid-Atlantic Area Ernst & Young June 7, 2003. Tech Investing: The Good News & The Bad News. Venture Capital Today:. …The bad news: Public markets shut tight Less money being raised

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Today’s Venture Capital Environment

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  1. Today’s Venture Capital Environment Ted R. Woolschlager Director, Emerging Growth Markets Mid-Atlantic Area Ernst & Young June 7, 2003

  2. Tech Investing: The Good News & The Bad News

  3. Venture Capital Today: …The bad news: • Public markets shut tight • Less money being raised • Funds being closed … A challenging environment

  4. Extremely 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

  5. - - - The Hangover Effect: The Math Is Ugly From 1995-2000: Companies funded Went public Were acquired Went out of business Remaining 14,463 978 1,529 1,180 10,776 Source: Venture Economics; Venture Source

  6. …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

  7. Funds Raised by Venture Capital Firms Q2:00 to Q2:02 • Less competition for new deals $ mil Source: PricewaterhouseCoopers / Venture Economics / National Venture Capital Association / Money Tree

  8. Slower Investing PaceVC Equity Into Venture Backed Companies Amount Invested ($B) Number of Deals *Note: 9/30/02 Figures Annualized

  9. “First Sequence” Financings: Q1 1995 – 2002 YTD Amount Invested ($B) Number of Deals

  10. Median Valuations of Venture Rounds Q1:00 to Q2:02 • “Venture valuations Go Back to Levels of Mid-1990s” • -The Wall St. Journal, August 28, 2002 • Valuations down 61.4% in 8 quarters Median Pre money Valuation ($ mil) Source: VentureOne

  11. Attractive Valuations

  12. 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: 1987 IPO: 1990 AOL: 1st VC Funding: 1986 IPO: 1992 UUNet: 1st VC Funding: 1990 IPO: 1995 Sale: 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: 1977 IPO: 1980 MSFT: 1st VC Funding: 1976 IPO: 1986 Symbol: 1st VC Funding: 1975 IPO: 1979 Venture Capital Has Always Been a Cyclical Business

  13. Huge 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 Source: DRI-WEFA Study; NVCA

  14. Venture Has Outperformed Other Asset Classes in the Medium and Long Run Source: NVCA / Venture Economics

  15. A 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

  16. Focus on Biotechnology 16 !@ #

  17. Global Biotech at a glance Key metrics Number of companies Public companies Private companies Total Revenue ($m) R&D expense ($m) Net loss ($m) Number of employees $34,874 $16,427 $(5,933) 188,703 622 3,662 4,284

  18. Biotechnology is a global industry . . . 104 / 1,879 342 / 1,457 85 / 416 Canada Europe U.S. 91 / 532 Asia/Pacific Distribution of public/total biotechnology companies driving the emergence of centers of excellence. 18 !@ #

  19. !@ # . . . and is concentrated in the U.S. and Europe Countries we covered 79% Europe 22% U.S. 72% Others 21% Canada 3% Asia/Pacific 3% Share of global biotechnology revenues (Public companies) Global GDP 19

  20. !@ # Major findings Rapid Growth 2nd Largest Concentration of Biotech Companies Record-Level Venture Fundings and Drug Approvals Europe Canada U.S. 12th Consecutive Year Of Revenue Increase Asia/Pacific Emerging Biotech Player 20

  21. !@ # Partnering Across Borders Pharma seeking new technology Canada Mature market Short term earnings boost Europe U.S. Asia/Pacific Biotech seeking global development and capital Source: Ernst and Young Beyond Borders Report 2002 21

  22. Conclusions • 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

  23. Conclusions: • Now is a good time to invest -- valuations are low, terms are good (for the buyer) • The pace of innovation continues -- growth will return, and historically the most money has been made investing at cyclical bottoms • Private equity is institutionalizing – a handful of brands will emerge; standards will be the norm

  24. Thank You

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