Startup Capital Ventures Venture Capital Climate for Q3 2010 shows an imbalance between inflows and investments despite an excellent IPO and M&A environment and strong VC returns.
1. US VC Investment Climate
Q3 2010
www.startupcv.com
tdick@startupcv.com
2. Hong
Kong
Silicon
Valley
What’s Going On In The US VC Cycle?
Page
2
VCs
Invest In
Startups
Startups
Exit Via
M&A or
IPO
VCs
return
capital to
LPs
LPs
Invest In
VCs
3. Hong
Kong
Silicon
Valley
Page 3!
US Venture Fundraising Bumping Along At
Record Lows Of $2-3B Per Quarter
Source: Thomson Reuters / NVCA
0
2000
4000
6000
8000
10000
12000
14000
16000
2006 Q1Q2 Q3 Q42007 Q1Q2 Q3 Q42008 Q1Q2 Q3 Q42009 Q1Q2 Q3 Q42010 Q1Q2 Q3
MoneysRaised($M)
Year / Quarter
US Venture Capital Raised
4. Hong
Kong
Silicon
Valley
Although Slightly More (& Therefore
Smaller) Funds Were Raised
Page 4!
0
10
20
30
40
50
60
70
80
90
2008 Q1 Q2 Q3 Q4 2009 Q1 Q2 Q3 Q4 2010 Q1 Q2 Q3
NumberofFunds
Quarter
Number Of US VC Funds Raising Capital
Source: Thomson Reuters / NVCA
5. Hong
Kong
Silicon
Valley
VC Has Outperformed
Public Market Returns
Page
5
Source: Cambridge Associates
• .com boom• .com bust
6. Hong
Kong
Silicon
Valley
A Good Proportion Of Funds Raised Were
New Funds
Page 6!
Source: Thomson Reuters / NVCA
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FundsRaised(Count)
Quarter / Year
New Vs. Follow-On Funds Raised
New
Follow On
7. Hong
Kong
Silicon
Valley
Fundraising Has Slowed For Several Reasons
Page
7
“Over the last two years, alternative asset
allocations have declined and the exit market has
suffered, putting venture firms in the unenviable
position of communicating their value in an
extremely challenging environment.
- Mark Heesen, NVCA
Current cash-flow needs have shifted some LPs
asset allocations away from illiquid and
alternative asset classes such as VC & PE
8. Hong
Kong
Silicon
Valley
$-
$1,000,000,000
$2,000,000,000
$3,000,000,000
$4,000,000,000
$5,000,000,000
$6,000,000,000
$7,000,000,000
$8,000,000,000
$9,000,000,000
AmountInvested($)
Year / Quarter
US Venture Capital Invested (2003 - 2010)
Page 8!
However Venture Capital Invested Has
Rebounded To $5-6B Per Quarter
Source: Thomson Reuters / NVCA
* Last quarter is always under-counted
9. Hong
Kong
Silicon
Valley
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2003 2004 2005 2006 2007 2008 2009
MoniesInvested(%)
Year
US Venture Investing Mix
Telecommunications
Software
Semiconductors
Retailing/Distribution
Other
Networking & Equip't
Med Devices & Equip't
Internet & Web 2.0
IT Services
Cleantech
Healthcare Services
Financial Services
Electronics/Instruments
Consumer Prod's & Svc's
Computers & Peripherals
Business Prod's & Svc's
Biotechnology
<<<<<<<<< Cleantech >>>>>>>>>>
<<<<<<<<<<Software >>>>>>>>>>>>
<<<< Semiconductors >>>>
<<< Medical Devices >>>
IT services
Internet
Software & Biotech Remain Largest Sectors
With Cleantech & MedTech Growing
Page 9!
Source: Thomson Reuters / NVCA
2010
10. Hong
Kong
Silicon
Valley
Silicon Valley & Route 128 Remain 50% Of
Market, But L.A. & N.Y. Growing
Page 10!
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007 2008 2009 2010
Upstate NY
Unknown
Texas
SouthWest
Southeast
Oklahoma
Silicon Valley
San Diego
Sacramento/N.Cal
Philadelphia Metro
NY Metro
Northwest
North Central
New England
Midwest
LA/Orange County
DC/Metroplex
Colorado
Source: Thomson Reuters / NVCA
11. Hong
Kong
Silicon
Valley
US Maintaining Its Share (65%)
In Global Venture Market
Page 11!
0
5
10
15
20
25
30
35
40
45
50
2007 2008 2009 2010 *
Investment(%OfMonies)
Year
Venture Capital Funding By Region
US
Israel
India
China
Europe
Source: DowJones VentureSource
* 2010 based on Q1 statistics
12. Hong
Kong
Silicon
Valley
Investment Is Focused On
Expansion Stage
Page 12!
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009 2010
PercentageOfMoniesByStage
Year
US Venture Monies Invested By Stage
Later Stage
Expansion
Early Stage
Startup/Seed
Source: Thomson Reuters / NVCA
13. Hong
Kong
Silicon
Valley
Page 13!
Fewer A & B Rounds But More C & D
Reflect VC Tilt To Expansion Deals
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007 Q1Q2 Q3 Q42008 Q1Q2 Q3 Q42009 Q1Q2 Q3 Q42010 Q1Q2
SeriesMix(%)
Quarter / Year
Series Of Venture Funding Over Time
E & Later
D
C
B
A
Source: Fenwick & West
14. Hong
Kong
Silicon
Valley
First And Expansion Round Sizes Increased
While Late Stage Has Fallen
Page 14!
-
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
2005 2006 2007 2008 2009 2010 Total
AverageInvestmentSize($)
Year
Investment Round Size By Stage
Startup/Seed
Early Stage
Expansion
Later Stage
Overall Average
Source: Thomson Reuters / NVCA
15. Hong
Kong
Silicon
Valley
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007
Q1
Q2 Q3 Q4 2008
Q1
Q2 Q3 Q4 2009
Q1
Q2 Q3 Q4 2010
Q1
Q2
Up/Flat/NeutralValuations(%)
Year / Quarter
Financing Round Valuation Mix
Up
Flat
Down
Page 15!
Up-Rounds Back To Majority Of
Of Funding Events
Source: Fenwick & West
16. Hong
Kong
Silicon
Valley
Multiple Liquidation Pref’s Normative But
Pay To Play* Increasing
Page 16!
Source: Fenwick & West
0%
5%
10%
15%
20%
25%
30%
2007 Q1Q2 Q3 Q42008 Q1Q2 Q3 Q42009 Q1Q2 Q3 Q4Q1 2010Q2
PercentageofRoundsw/Provisions
Year / Quarter
Investment Round Provisions
Multiple Liquidation Preferences
Pay To Play
* A new form of contractual
“pull up” whereby
conversion to common is
automatic if participation
does not occur is
emerging
17. Hong
Kong
Silicon
Valley
Page 17!
Exits! VC-Backed M&A & IPO Activity Is
Healthy: $16B Raised In Q3
Source: Thomson Reuters / NVCA
0
20
40
60
80
100
120
140
2006 Q1Q2 Q3 Q42007 Q1Q2 Q3 Q42008 Q1Q2 Q3 Q42009 Q1Q2 Q3 Q42010 Q1Q2 Q3
TransactionCount
Quarter
US Venture-Backed IPO & M&As
IPOs
M&As
18. Hong
Kong
Silicon
Valley
$-
$50
$100
$150
$200
$250
$300
$350
$400
$450
2006 Q1Q2 Q3 Q42007 Q1Q2 Q3 Q42008 Q1Q2 Q3 Q42009 Q1Q2 Q3 Q42010 Q1Q2 Q3
Transaction/OfferingSize($M)
Year / Quarter
Venture Exit Transaction Sizes
Avg. Reported M&A
Value
Avg. IPO Float
Page 18!
VC-backed IPO and M&A Deal Size Is Strong
& VCs Will Be Returning Capital To LPs
Source: Thomson Reuters / NVCA
19. Hong
Kong
Silicon
Valley
The Venture Funding Cycle Is Imbalanced*
Page
19
VCs Invest $5B
In Portfolio
$16B In
Venture Exits
LPs Invest
$3B In VCs
Sources: Thomson Reuters, Dow Jones, Fenwick & West
* Q3 2010
20. Hong
Kong
Silicon
Valley
A Fork In The Road: Market Equilibrium
Must Return (One Way Or Another)
• VC exit activity of $16B in Q3 is at the highest levels
since 2007 with good valuations
• VCs returning capital to LPs again
• VCs are investing at levels of $5 - $6B per quarter...
• But LPs are funding VCs at at just $2 - $3B per quarter
Page
20
• Venture capital
declines to match
lower LP
investment in VC
• VC continues at
today’s level if LPs
increase allocation
to VC sector