Mgh Oc Venture Group 2007 09 12

VC in the OC
Breakfast Keynote Address

September 12, 2007

Mark G. Heesen
President

Venture Capital –
Barely a macroeconomics
rounding error in the world of
US finance….

US Venture Capital Investment in
Perspective
US GDP $12.5 trillion annually
Hedge fund intake $1.5 trillion over last 3 years
estimated
Mutual fund intake $158 billion in 2006
Buyout intake $103 billion in 2006
Venture capital intake $28.6 billion in 2006
Venture capital fundraising & investment Is 0.2% of
total GDP
Source: BLS website, Investment Company Institute, Thomson Financial, NVCA

Global Insight Study
In 2006, venture backed companies:
Provided 10.4 million US jobs
Had sales of $2.3 trillion
Represents 17.6% of GDP
Still dominated venture-created sectors
56% of biotech revenue
78% of computer and peripherals revenue
94% of computer and peripherals jobs
88% of software sector jobs
Outgrew the economy 2003-2006 in every
sector

Source: Venture Impact 2006 by Global Insight

Venture-Backed Employment
VC-Backed US Jobs (millions) As a % of total US Pvt Jobs in 2006

10.4
10.5

VC-Backed
10
Jobs = 9%
9.4
9.5
Outpaces 2003 - 2006
9
8.7 Total US Job Growth
3.6%
4.0%
8.5
3.0%

8 1.7%
2.0%

1.0%
7.5
2000 2003 2005 0.0%
VC-Backed Growth Pvt Sector Growth


VC-Backed Companies Share of Total Employment
Top Sectors 2006

Software Employment
Computers and Peripherals
Employment
12%
6%

88%
94%

VC-Backed Total VC-Backed Total

Telecomm Employment
Medical Devices Employment

17%
48%
52%
83%

VC-Backed Total
VC-Backed Total


Venture Capital Investment
is Productive ...

For VC every dollar invested in 1970-2001, there was
$7.90 in US revenue during 2006
For every $28,463 of venture capital invested in 1970-
2001, there was one job in the year 2006

Note these ratios are based on investment through 2001 ($296B)
because investment after that time has likely had little effect on jobs and
revenues. If investment through 2006 ($421B) is used, the ratios would
be $5.55 and $40,364 respectively

The Number of US VC Firms Has
Peaked .. Thankfully
At Year # Venture Capital Under
End Firms Mgt
1970 28 $1B
1980 89 $4B
1990 395 $30B
2000 881 $228B
2001 946 $255B
2006 798 $235B
Source: 2007 NVCA Yearbook, prepared by Thomson Financial, figure 1.04

Investment Marches On -
Rumors that the Venture Industry
has stopped investing are greatly
exaggerated

VC Investment Peaked in 2000;
Recently 20-23% of Peak;
2006 Was Higher
$120,000

$100,000
$ Million Invested

$80,000

$60,000

$40,000

$20,000

$0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
1H07
Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data: Thomson Financial

1998 to 2006:IT share from 53% to 50%;
LS share from 13% to 28%
In 2007, LS is 33% (Was 35% in Q1 2007!)
1998

2006

1H07

0% 20% 40% 60% 80% 100%

IT Life Sciences Consumer, Other


Cleantech/Greentech shows significant growth
nationally
$1,600 140

$1,400
120

$1,200
100

$1,000
80
Invested $M
$800 # Deals

60
$600

40
$400

20
$200

$0 0
2000 2001 2002 2003 2004 2005 2006 1H07


Number of First Time Fundings
(New Projects) is On Track to
Post-Bubble High!
3,500
3,000
2,500
2,000
1,500
1,000
500
- 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1H07
891 1,143 1,286 1,408 2,442 3,370 1,217 835 749 909 997 1,134 592
First Fundings


The Reconcentration of
Investment Within the US

Top 5 States by Percentage
Invested Within State in 2006
(75% of Investment by CA-domiciled funds was into CA companies)
80.0

70.0

60.0

50.0

40.0

30.0

20.0

10.0

0.0
CA WA TX NC RI
75.0 53.0 50.0 44.0 41.0
% in state

Source: NVCA 2007 Yearbook produced by Thomson Financial

# of States Receiving Funding
from CA VCs in 2006 is Up!
40

35

30

25

20

15

10

5

0
1985 1995 2006
31 30 37
# States

Source: NVCA 2007 Yearbook produced by Thomson Financial

California Share seems to be Ever-
Increasing
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1998 2000 2006 1H07
62% 59% 52% 51%
49 states %
9% 8% 12% 15%
SoCal%
29% 33% 36% 34%
NorCal %


What’s Happening in the
Californias and the OC?
Latest Data from the
PricewaterhouseCoopers/National Venture Capital
Association MoneyTree™ Report, Data: Thomson
Financial

For an interactive state analysis tool:
www.pwcmoneytree.com

SoCal Investment –
Tracks at or above national trends
$10,000 800

$9,000
700
$8,000
600
$7,000

# Upstate Deals
500
$M Invested

$6,000

$5,000 400

$4,000
300
$3,000
200
$2,000
100
$1,000

$0 0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1H07
1,283 1,841 4,805 8,929 3,595 2,222 1,909 2,215 2,707 3,169 2,132
$M
252 330 486 742 398 257 265 274 320 346 191
# Deals

$M # Deals


SoCal’s share has grown over the past
decade (MoneyTree regions aggregated for presentation)
80%
70%
60%
50%
40%
30%
20%
10%
0%
1998 1H07
17% 12%
MidAtl & NY
11% 13%
New England
9% 15%
SoCal%
29% 34%
NorCal %


The Exit Scene -
the importance of acquisitions
has become clear over the past
several years

IPO Levels Jumped in 2004 but
not sustained; New hope in 2007?
30.0 300

25.0 250

20.0 200

Number of IPOs
Offer $B

15.0 150

10.0 100

5.0 50

0.0 0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1H07
Source: Thomson Financial/National Venture Capital Association

Recent Median IPO Valuations Are
Consistently Higher than Pre-1999
400

300

200

100

0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1H07
108 182 342 247 322 223 228 255 203 255 346
Median Val ($M)


What’s in the IPO Pipeline?
IPOs During Period and Registration Counts at Period
End
100
80
60
40
20
0 2003 2004 2005 2006 1Q07 2Q07
29 93 56 57 18 26
IPOs Done
31 57 16 36 44 40
In Reg on last day


“Happy” Acquisitions Do Exist –
4Q 2006 Was Strong
Ratio of sale price to total VC investment

400
# of M&A Exits

300

200

100

0
2003 2004 2005 2006 1H07
17 39 38 60 7
>10x TVI
38 72 69 67 10
4x-10x TVI
125 116 135 114 18
1x-4x TVI
113 115 104 94 20
< TVI

Source: Thomson Financial/National Venture Capital Association – Undisclosed txns are prorated

Venture Exit Counts-
IPOs and M&A by Year
700
M&A
600
IPO
500
Number of Issues

400
300
200

100
0
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
'00
'01
'02
'03
'04
'05
'06
1H07
Year

For First Fundings From 1991 to 2000,
Approximately 33% Were Acquired and
14% Went Public
[11,686 Companies Total]
Acquired
33%

Public or In Reg
14%

Still Private
35%
Known Failed
18%

Of Companies Receiving First Funding in
2001 and 2002, There Are Few Exits
[2040 Companies Total]
Acquired
21%

Public or In
Reg
3%
Known Failed
8%
Still Private
68%


Public Policy and
The Venture Industry

Big Challenges …

What’s Running the Show in 2007?
An expensive war
Congressional eagerness to eliminate middle
class AMT
Revenue scoring
It’s silly season*
Vague legislation creating less predictable
outcomes

* - Defined as the 4-year period leading up to a presidential election

Mgh Oc Venture Group 2007 09 12

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