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State of the Market 2005 A Slow Return to Normalcy Robert R. Ackerman, Jr.

State of the Market 2005 A Slow Return to Normalcy Robert R. Ackerman, Jr. Managing Director; Allegis Capital Corporate Venturing & Strategic Partnering Conference May 17, 2005. U.S. Venture Environment.

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State of the Market 2005 A Slow Return to Normalcy Robert R. Ackerman, Jr.

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  1. State of the Market 2005 A Slow Return to Normalcy Robert R. Ackerman, Jr. Managing Director; Allegis Capital Corporate Venturing & Strategic Partnering Conference May 17, 2005

  2. U.S. Venture Environment

  3. After 3 Down Years, Investment Rises in ’04Deal Flow and Equity into Venture-Backed Companies 6287 $100 $94.6 6,000 5,000 4586 $75 4,000 3246 $49.5 $50 3,000 2547 2340 2211 $36.2 2067 2092 1912 2,000 1315 $21.8 $25 $20.4 1075 $18.9 $17.9 $13.1 1,000 $9.2 $6.4 $4.4 $0 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Amount Invested ($B) Number of Deals Amount Invested ($B) Number of Deals Source: Dow Jones VentureOne/Ernst &Young

  4. Activity Slows in 4Q’04 Deal Flow and Equity into Venture-Backed Companies Amount Invested ($B) Number of Deals Source: Dow Jones VentureOne/Ernst &Young

  5. Deal Flow Maintains Typical DivisionDeal Flow Allocation by Industry Sector % of Total VC Rounds Source: Dow Jones VentureOne/Ernst &Young

  6. Round Allocation Back to Mid-’90s LevelsDeal Flow Allocation by Round Class (Annual) % of Total VC Rounds *Seed and First Rounds Combined Source: Dow Jones VentureOne/Ernst &Young

  7. Most Dollars Directed at 2nd & Later RoundsInvestment Allocation by Round Class (Annual) % of Dollars Invested *Seed and First Rounds Combined Source: Dow Jones VentureOne/Ernst &Young

  8. 100% 80% Restart Later 60% Second 40% First 20% Seed 0% 4Q01 2Q02 4Q02 2Q03 4Q03 2Q04 4Q04 Capital Allocation to Later Rounds ContinuesInvestment Allocation by Round Class 5% 10% 45% 48% 47% % of Dollars Invested 34% 24% 31% *22% *24% *19% *Seed and First Rounds Combined Source: Dow Jones VentureOne/Ernst &Young

  9. Median Deal Size Consistent in 2004Median Amount Invested Per Financing Round Median Amount Invested ($M) Source: Dow Jones VentureOne/Ernst &Young

  10. 2nd & Later Stage Rounds Larger in 2004Median Amount Invested by Round Class (Annual) Median Amount Invested ($M) Source: Dow Jones VentureOne/Ernst &Young

  11. West Coast Dominates Venture InvestmentRegional Investment in the United States 4Q’04 Source: Dow Jones VentureOne/Ernst &Young

  12. Valuations Rise to Pre-Bubble Levels in 2004Median Premoney Valuation by Year $25.0 $25 $20.6 $20 $16.0 $15.5 $15 $13.0 $12.9 Median Premoney Valuation ($M) $11.1 $10.8 $10.0 $10.0 $9.3 $10 $8.2 $5 $0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

  13. 2nd and Later Stage Valuations Rise in 4Q’04Median Premoney Valuations by Round Class (All Industries) $40 $40 $30 $30 Median Premoney Valuation ($M) $20 $15 $16 $10 $6 $7 $3 $3 $0 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 Later Stage Second Round First Round Seed Round

  14. IPO Activity Slows in 1Q’05Deals and Amount Raised Through IPOs

  15. Fewest Venture-Backed IPOs in Six QuartersDeals and Total Amount Raised Through IPOs

  16. 1Q’05 IPOs Raised Less Prior to Going PublicMedian Amount Raised Prior to IPO

  17. And Went Out at Lower ValuationsMedian Pre-Valuation at IPO

  18. Smaller Offering Sizes Seen in 1Q’05Median Amount Raised at IPO vs. Median Pre-Valuation at IPO

  19. European Venture Enviroment

  20. Perspective on European MarketEquity Investment in Venture-Backed Companies, US vs. Europe ($) Overall Investment Amount Invested ($B) Source: Dow Jones VentureOne/Ernst &Young

  21. European Investment Up in 4Q’04Equity Investment in European Venture-Backed Companies Amount Invested (€B) Number of Deals Source: Dow Jones VentureOne/Ernst &Young

  22. Biopharm & Software Lead 4Q’04 InvestingEquity Investment in European Venture-Backed Companies by Industry, 4Q ‘04 Source: Dow Jones VentureOne/Ernst &Young

  23. Early Stage & 2nd Rounds Pick Up in 4Q’04European Deal Flow Allocation by Round Class % of Total VC Rounds *Seed and First Rounds Combined Source: Dow Jones VentureOne/Ernst &Young

  24. UK & France Represent 50% of Deal FlowTotal Deals in Europe by Country, 4Q’04 Source: Dow Jones VentureOne/Ernst &Young

  25. UK Leads 4Q’04 European InvestmentInvestment in Europe by Country, 4Q’04 Source: Dow Jones VentureOne/Ernst &Young

  26. Investment in France & UK Picks Up in 4Q’04Equity Investment by Country Amount Invested (€M) Source: Dow Jones VentureOne/Ernst &Young

  27. So, What’s it all Mean…

  28. Summary • Capital In-Flows Up Significantly • $17.5B In New Commitments in 2004 (98’ Levels) • $10.8B in 2003 -- $3.7B in 2002 • Capital Out-Flows Grow and Moderate • $20.9B in New Investments ($18.1B in 2003) • 110% of 03’ -- 97% of 02’ -- 51% of 01’ -- 20% of 00’ • At 97’ to 98’ Levels • Approx $40B Still in the Funnel • Corporate VC Stabilized (but concentrated) • $1.4B ($1.2B in 03’) • 97-98 Levels • Select new Entrants to the Market

  29. Summary - continued • Path to Liquidity is encouraging “Start-Ups” • Growing Confidence • 2004’ –27% Series A Financings (21% of Capital) • 2003’ – 20.7% Series A Financings (8.4% of Capital) • 2002’ – 15% Series A Financings • Indications that trend line is positive – 24% Year over Year Increase in Deals • Historically In the Range of 30-35% • “Seed Corn” for Follow-On Financings • Capital Flowing to the Early and Expansion Rounds • Follow-On Financings to the Series A of 2001/2002 • 72% of Investments in 2004 (79% of Capital) • Valuations are ticking up significantly for later rounds of Investmtn

  30. Looking Forward…

  31. What to Expect • Venture Capital Industry “Reorganization” continues • Restructuring Leading to New Firms • Venture Industry Consolidates (25% Fewer Firms) (30-50%) • Capital Inflows continue to Grow • Institutional Investors are Back (with too much money) • 2005 - $22B in New Commitments? • Over Capitalization?? • Funds Return to Basics (VC is not EASY) • It’s not like a “Mutual Fund” • $250M will be a “good sized” fund for early-stage VC ($400M the upper limit?) • Focus on “experience” in VC Professionals • “Hands-On” attitude/expectation for Investors • Collaboration becomes a required skill • Excess Capital will push firms to Early-Stage Investing • Money is made on the “initial investment” – Cost is an Essential Consideration. • Concern: Are the Skills There? Valuation – Driven

  32. What to Expect - continued • M & A Activity Continues to “Heat-Up” • Renewed Confidence on the part of “Buyers” – Cash Surplus • $22.6M Avg in 04’ -- $12.9M in 03’ • Consolidation in to Sales Channels • Public Market Stabilizes – IPO’s Return(with Deliberation) • 04’ – 93 VC-backed IPOs raising $11B • 03’ – 29 VC-backed IPOs raising $2B • The Bar is not coming down…anytime soon. • Patience • Time to M & A Exit – 4.7 Years • Time to IPO Exit - 5.7 Years ($73.2M)

  33. In Closing…

  34. Re-Building on a New Foundation… • 2004 – The Fundamentals “Restored” • Capital Flows into VC Fund approaching $20B • VC Investments stabilize around $20B • IPO Window and Increased M & A activity renews cycle of positive returns • The Venture Community • Consolidation continues – still adopting to the new “Reality” • Venture Firms still at the low-end of the historical “experience curve” • Syndication – rediscovery of the lost art • Corporate Venture Investors • Institutionalization • The next cycle “starts” – Globalization pushing Accelerated Innovation

  35. But, Caution is Indicated… • The Path to Liquidity is Limited • Caps the Potential for Returns • While Capital In-Flows Continue to Grow • Over-Capitalization in the Pipeline • Returns (next generation funds) Under Pressure? • Push to Earlier-Stage Investing • VC Experience – A Potential Blind Spot • Bubbles are Building • China – The Real Deal but a Very Rocky Road (ala Internet) • “Group Think” continues to plague the Industry

  36. Thank You!

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