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

2. 2
Critics of venture capital returns fall
prey to rearview mirror analysis

3. Let’s start with
some facts that
everybody
knows
3

4. 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)

5. 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

6. As a result, the startup ecosystem
became over-capitalized
Source: PWC/NVCA MoneyTree Report6
$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

7. 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 Reuters7
$42
$27
$178
$142
$40
$32
$38
$92
273 268
611
537
404 392 369
503
4

8. The math is simple …
8
LP money
# of VCs
Exits (#, value)
VC fundings (deals, size, value)
Poor performing asset class 1999-2007
DUH.=

9. And as we know, the hangover
from this over-investment lasted a
decade
9

10. Will the road ahead be the same?
Let’s look at the facts …
10

11. 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

12. NOW1995
Online speeds are over 180x faster
Source: Akamai ‘s State of the Internet Q1 201412
56 Kbps
modems
10.5 Mbps
average U.S.
Internet
connection
speed!
2

13. People are mobile: connected
everywhere, all the time
Source: 2014 Statista forecasts13
• 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

14. Everybody is socially connected
driving viral growth at faster rates
14
Monthly active
users255M
Monthly active
users1.3B+
Global registered
members300M+
Hours of video watched
each month by 1B+ users6B+
4

15. We all have credit cards on file with a
single click to purchase
Sources: eMarketer, WSJ15
Global ecommerce spend
$1.5 trillion1 billion
Digital shoppers worldwide
The Apple app ecosystem alone estimated
to be $35 billion in 2014 (from $0 in 2008)
5

16. • Education (remote learning)
• Healthcare (doc on demand)
• Defense (drones)
Economic pressures + improved
telepresence will transform industries
such as …
16
6

17. 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

18. In fact, FLAG Capital estimates the number
of active tech VCs is less than 100
Source: Thomson Venture Economics, NVCA Yearbook 2013, FLAG internal analysis18
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

19. If Anything:
It’s Morning in Venture Capital
19

20. 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.=

21. But our industry has
clearly changed.
VCs (and LPs) can’t
be complacent.
21

22. 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

23. • Angels
• Incubators / Accelerators
• Seed funds
• VCs
• Crowdsourcing
With less $$ required there are many
more sources from which to raise
money
23
2

24. 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

25. How important is blogging / transparency?
52% say critical to VC decision. 96% prefer it
Source: Upfront Ventures Survey data25
96%
52%
44%
4%
Essential or important Nice to have Negative, not wanted

26. • Servers
• Routers
The plumbing & infrastructure phase
was & is dominated by Silicon Valley
26
• Switches
• Databases
• Browsers
• Search
4

27. But increasingly there have been regional
successes in monetizing the web at a
higher layer (the three C’s)
27
• Content
• Commerce
• Communications
4

28. Not surprisingly some of the best performing new
funds are not from traditional strongholds
28

29. 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

30. But LP money has largely becoming
concentrated in Growth VC funds
(> $500m)
*Q1 2014. Source; Q2 2014 PitchBook US Venture Industry Data Sheet30
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

31. 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

32. 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 1981-201232
9%
25%
66%
Multi-stage
Late-stage
Early-stage
VC Annual Fund Performance

33. 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”

34. How are modern
VCs differentiating?
Providing more
value.
34

35. Entrepreneurs want thought leadership
as well as operational experience
Source: Upfront Ventures Survey data35
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

36. 36
Seller Buyer
• Distributors
• Physical
locations
• Brokers
Cutting Out
VCs encourage all of their portfolio
companies to “go direct” to consumers

37. • 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

38. • 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

39. • More time
• Closer in skills
• Recent methods
We know that kids learn
much better from peers
than parents
39

40. • 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

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

42. 42
• CEO workshops
• University style hands-on
learning from key
industry figures
• Video sessions for further
use

43. 43
Leading funds putting big investments
into operational support staff
Some Best in Class Services
4

44. In-house tools & resources
• Recruiting
• PR
• Designers, engineers & execs
• Business development
44

45. • Hands-on support teams for design,
recruiting, marketing & engineering
• Startup Lab workshops
• Events / networking conferences
45

46. 46
• Accounting
Services
• Education
• Blogging /
Marketing Services
• Inside Sales
• Recruiting
• Market Research
Example Services Provided

47. 47
One of most important differentiators is
domain knowledge & providing industry
access for deals
Some Best in Class Industry Networks
5

48. • Best domain knowledge & relationships in ad sector
• CEO summits with key industry players
• Ad Agency Days where portfolio presents to buyers of
Ad Tech48

49. • Holds “Future of TV” summits with key industry leaders
• Blog & provide thought leadership on: Online Video,
Ad Tech, Mobile & SaaS
• Strategic LPs / Portfolio meetings49

50. • Took an early market position on “big data” (IA =
information arbitrage)
• Deep financial services relationships / knowledge
• Executive relations at financial data companies like
Reuters, Bloomberg50

51. 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

52. We’re inspired by what we see our colleagues in
the industry doing. We believe …
Thank You
It’s Morning in Venture Capital