Venture capital was one of the best asset classes in the world before the dot-com bubble burst. Over the next 10 years, returns plummeted as a result of too much capital in the sector and a lack of public market liquidity.
Then, just as the start-up world was recovering from the tech bubble of the last decade and the negative effects of the ill-considered Sarbanes Oxley legislation, the 2008 financial erupted.
So today, the venture capital community finds itself at a cross roads. While the asset class has been largely abandoned by institutional investors, this disinterest will paradoxically lead to superior returns in the future.
Consider…….
1. Venture capital is no longer be considered a “necessary asset class” to invest in by many limited partners given the sectors insignificant size relative to the financial assets LPs have under management
3. Limited partners, who generally look retrospectively to determine their portfolio allocations, not progressively, have shunned the asset class.
4. But, as a result of this shaking out of the venture capital sector (in terms of #’s of firms and amount of capital raised by those firms) conditions are now actually favorable for sustained long term returns
Taking a data-driven prospective, this presentation argues that the conditions today in the private and public capital markets bode well for superior performance to return to the venture capital asset class this decade. Specifically, therewards accruing to private investors in the leading tech companies of today far exceed what private investors used to earn from their investment in the best companies of previous tech cycles. Several things have changed in the past 5 years or so that have led to this change. This presentation explores what those changes have been.
2. RT @MarkTwain The reports of my death have
been greatly exaggerated.
C L E A R S T O N E William Quigley
Managing Director
3. 10 Years ago…
The decade began on a high note… but quickly
evolved into extraordinary difficult times."
C L E A R S T O N E William Quigley
Managing Director
4. Unstable Situation "
Venture Capital Environment - Circa 2000/2001 "
2000 / 2001
Trend Direction…
Valuations
Very high
Falling
Capital availability
Substantial
Beginning to tighten
Fund commitments
$83B & Big Overhang
Shrinking
# of Active Firms
1338
At a high but going down
Tracking index –
NASDAQ
4000
Falling rapidly
Technology spending
Historically High
Dropping quickly
5. VC Fundraising and Performance "
Plummet After a 7X Increase in Capital in Just 4 years
$
90
80
$83
70
60
50
$B
$57
40
$45
30
20
$27
10
$17
$19
$12
$9
0
1996
1997
1998
1999
2000
2001
2002
2003
Source: DowJones VentureSource, NVCA.
6. In the 2000s"
Venture Capital Exits Shifted from IPOs to Less Valuable M&A
VC
Exits:
‘91
–
‘00
VC
Exists:
‘01
–
‘‘09
VC Exits: ‘01 –
09
IPO
12%
M&A
42%
IPO
58%
M&A
88%
Source: NVCA.
12. Much of the recent LP funding to
venture capital has gone into
Cleantech
13. Cleantech Share "
Venture Investments Up 8X
Cleantech investments have crowded-out
other sectors, further decreasing funds
directed towards IT investing.
Source: NVCA.
16. Venture Capital Assets Under Management Are "
Lower Today Than They Were a Decade Ago
300
$262
$270
$277
$253
$253
$254
$255
250
$225
$204
200
$179
150
$B
100
50
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Venture capital investments are now outpacing new funding
commitments by LPs, draining the pool of investable capital."
Source: NVCA.
17. Venture Capital Fundraising As a % of GDP "
Has Rapidly Fallen
$16
$14.1
$14.4
$14.7
1.0%
$13.4
$14.1
$14
$11.1
$11.9
$12.6
0.8%
$12
$10.3
$10.6
$10.0
$10
0.6%
$T
$8
$6
0.4%
$4
0.2%
$2
$0
0.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Venture Capital fundraising as a % of GDP
has been declining since 2000.
Source: DowJones VentureSource, Bureau of Economic Analysis.
18. Consider…
C L E A R S T O N E William Quigley
Managing Director
21. But After a Long Shake Out, "
Attractive Conditions Ahead…"
• Venture capital fund commitments down for last 3 years
– Positive contra-indicator
• Early stage valuations stable…
– While late stage and IPO valuations growing
• Strong public market appetite for growth stories
– Recent IPOs in the enterprise and consumer
services sectors well received
22. Venture Capital Firms"
Only the Strongest Survived the Post-Bubble Shake-Out
Ac=ve
Informa=on
Technology
Investors
1600
#
of
Ac=ve
Firms
1400
1200
1000
712
514
398
381
800
449
405
416
426
375
313
>3
Deals/yr
600
400
726
724
672
<=3
Deals
626
591
613
597
572
614
572
200
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Active Investors Down"
– 712 active investors in 2000 versus 313 in 2009, a 56% decline."
Average Fund Size Increased"
– $165M in 2000 versus $200MM in 2009."
Source: DowJones VentureSource.
23. Venture-Backed IPOs Will Return to Pre Financial
Crisis Levels in 2011
100
86
80
No. of Venture-Backed OPO’s
80
72
57
57
60
40
20
12
6
0
2005
2006
2007
2008
2009
2010
2011E
A new generation of large market cap tech
companies will increase the field of acquirers.
Source: NVCA and Clearstone analysis.
Selected IPO’s shown in 2011. LinkedIn and Pandora have filed for IPO. Facebook and Groupon IPO are market speculation.
24. VC Environment Today"
Attractive Conditions
Economic Situation"
2011 Trend Direction…
Valuations Moderate Rising in Certain Growth
Markets
Capital availability Adequate Stable
Stable but trending down
Fund commitments $~12B
1/2 of the high &
# of Active Firms ~300
shrinking
Tracking index – Stable with IPO market
2800
NASDAQ open
Good and rising in some
Technology spending Stable
sectors
25. “the
Have you heard the maxim
venture model is
broken” in the last 6
months?
26. That question was really asking
“are VCs being
rewarded for their
work anymore?”
28. More so than earlier tech cycles,
private investors are being
rewarded for potential break out
value at IPO….
Lets look back at the so called
venture capital golden age…..
29. The Golden Age
C L E A R S T O N E William Quigley
Managing Director
30. How were the iconic tech
companies of the past
valued when they
went public?
41. How do the Golden Age
companies compare to
Today’s leading
tech companies?
42. More Value Accruing to Venture Investors, "
Not Public Shareholders
$70
$70
$60
Pre-Money IPO Valuations
$50
Public investors
$40
$40 participated in 99% of the
$B
terminal value of these
$30
companies
$20
$12
$10
$0.23 $0.44 $.065
$0
Cisco Amazon Microsoft VMware Google Facebook
Earlier Tech New Tech
Cycles Cycle
Source: Facebook Pre-Money IPO valuation $70B per
SharesPost private market exchange – February 2011.
43. IPO Valuations Now Exceed the Level "
Reached During the Tech Bubble
$
1200
1000
800
15
$
Millions
600
12
11
400
9
9
9
9
9
8
8
9
8
8
10
9
10
10
7
7
5
200
0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Mean
Company
Age
at
IPO
Mean
Pre-‐Money
ValuaKon
Mean pre-money IPO valuations of venture backed companies have
increased at a 16% CAGR since 1990, while company age at IPO
has remained relatively even.
Source: NVCA.
44. So why are early
stage companies
capturing more
value?
45. 3
Things Have
Changed
C L E A R S T O N E William Quigley
Managing Director
46. 1. Internet Growth
Internet Companies Can Reach Critical Mass Faster
% Global Users
2000
vs.
2010
Number
of
Internet
Users
(millions)
22.5
21.4% China*
420.0
124.0
12.2% United
States
239.2
47.1
5.0% Japan
99.1
5.0
4.1% India
81.0
5.0
3.7% Brazil*
72.0
2000
24.0
2010
3.3% Germany
65.1
3.1
3.0% Russia
59.7
15.4
2.6% UK
51.4
8.5
2.3% France
44.6
19.0
2.0% South
Korea
39.4
Source: Internet World Stats. 2010 data as of June 2010
*China figures do not include SAR Hong Kong, SAR Macao and Taiwan. Brazil data for 2009
47. 2. Capital Markets Better Informed
Proliferation of technology specialists in the public markets
Hedge
Fund
Industry
Growth
2.0
12,000
1.6
10,000
8,000
1.2
6,000
0.8
4,000
0.4
2,000
0.0
-‐
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Number
of
Hedge
Funds
$AUM
Trillions
More hedge funds = more specialized public investors who
understand the growth prospects of tech companies.
Source: Hedge Fund Research.
48. 3. Going Global, Faster
Start-ups Expanding Offshore Earlier in their Lifecycle
$5.7
$1.2
2000
2010
China
GDP
$2.0
$0.6
$1.4
2000
2010
Brazil
GDP
$0.5
2000
2010
India
GDP
Groupon
already
has
35
interna=onal
offices!
$
Trillions
Source: International Monetary Fund.
49. A Venture Capital Revival Is Upon Us
• Conditions are better today for private investors
than they have been in over a decade
• Fewer VC investors are putting capital to work
• Public investors are shifting their allocations back to
emerging growth stories
• This is not a repeat of the dot com and telecom
bubbles circa 1999-2000
• Today’s tech cycle leaders have global reach and
hyper attractive economics
• A new era technology start-up era has emerged
• Companies are scaling faster and accruing value
sooner than ever before
50. So what will drive venture
returns this decade?
• Overallocated to right sectors
• The best funds are sector funds
• IPO market will be healthy
• New sources of liquidity like second market
51. The Venture Capital Model Will Evolve
• Greater liquidity to LPs provided by an increasingly
active secondary position market
• Shortening of the VC investment cycle. Funds will shift
from 5 year investment terms to 3 years
• Growth in sector focused funds
52. Mobile
C L E A R S T O N E William Quigley
Managing Director
53. Mobile is a Burgeoning Market, Driven by
Smartphone Sales and…
Apple
iPhone:
Cumula=ve
Units
Shipped
100
90
80
70
60
Millions
50
40
iPhone
30
20
10
-‐
Source: Apple company filings
54. …Tablet Proliferation
2010
–
2015
Tablet
Sales
and
Users
(Millions)
50
90
80
40
70
Tablet PC
Tablet PC
Users
Sales
60
30
50
40
20
30
10
20
10
0
0
2010
2011
2012
2013
2014
2015
Total
Tablet
PC
Users
(US)
Tablet
PC
Sales
(US)
Source: Forrester
55. Cloud
C L E A R S T O N E William Quigley
Managing Director
56. Mass Adoption of Cloud Computing is
Expected to Help the Market Grow to
$150 Billion by 2013
Cloud
Services
Market
Size
(Billions)
$160
$150
$140
$120
$114
$100
$89
$80
$71
$56
$60
$46
$40
$20
$0
2008
2009
2010
2011
2012
2013
Source: Gartner
57. Mass Adoption of Cloud Computing is
Expected to Help the Market Grow to
$150 Billion by 2013
Percentage
of
PC
Unit
Sales,
US
24%
20%
18%
17%
16%
39%
30%
46%
32%
32%
33%
34%
34%
Desktops
39%
Notebooks/laptops
12%
12%
12%
12%
44%
13%
Netbooks/minis
46%
15%
38%
38%
38%
Tablets
29%
36%
17%
15%
8%
0
0
2008
2009
2010
2011
2012
2013
2014
2015
“With Microsoft, Google, and others investing in consumer cloud
services, we anticipate a virtuous cycle of adoption of tablets
driving adoption of cloud services and vice versa.” -Forrester
Source: Forrester
58. Social
Networking &
Online Games
C L E A R S T O N E William Quigley
Managing Director
60. Social Networks and Online Games Increasingly
Dominate Internet Usage
Share
of
Time
Online:
June
2010
Social
Networks,
23%
Other,
34%
Classified/AucKon,
Online
Games,
3%
10%
MulK-‐category
E-‐mail,
8%
Entertainment,
3%
Soeware
Portals,
4%
Manufacturers,
3%
Instant
Messaging,
4%
Search,
4%
Videos/Movies,
4%
Social networks and online games grew 31% in 2010
and now account for 33% of all time online
Source: Nielsen
61. Presented By:"
William Quigley Managing Director
C L E A R S T O N E