Recommendations from the National Venture Capital Association on how to improve the climate for venture-backed companies to go public

1. NVCA 4-Pillar Plan to Restore Liquidity
in the U.S. Venture Capital Industry
April 29/30, 2009
Dixon Doll
DCM Co-Founder and General Partner, NVCA Chairman
Mark Heesen
NVCA President
1

2. Reinvigorating Liquidity in the U.S. VC Industry
The Background The Situation The Solution
Liquidity Challenges
●
Job Creation
Lack of IPOs Is
●
Harmful to Job Innovation
Creation and Overall
Economy I II III IV
Ecosystem Enhanced Taxation Regulation
Partners Liquidity
Comprehensive
● Paths
Review of VC
Ecosystem Is Required
to Reinvigorate Our VC Industry U.S. Government
Industry (once
Financial Crisis & IPO
Markets Stabilize)
Drought Revealed
Systemic Issues
2

3. Venture Capital Fuels Job Creation
VC-Backed Companies 92% of Job Growth
Create Jobs Faster Occurs Post-IPO
Employment CAGR (2006 – 2008) VC-Backed Company Employment Growth
97% 94% 88% 76% 92%
Pre-IPO Post-IPO
12.1M Jobs Created
Sources: Left: Global Insight, 2009
Right: NVCA, Global Insight and Survey of Top 136 VC-Based Companies That Went Public 1970–2005
3

4. Numerous World-Leading Companies Were
First Funded or Founded During Downturns
1970s 1980s 1990s 2000s
F
4

5. Dramatic Decline in IPOs in the 2000’s
Number of Venture-Based IPOs vs. M&A Exits
2000s
1990s
1,776 392 IPOs M&A
IPOs M&A
13% 87%
56% 44%
IPOs IPOs
(’01 – ’08)
(’92 – ’00)
Lack of IPOs Is Harmful to Job Creation and Economy
Source: Thomson Reuters/NVCA
5

6. IPOs in Decline This Decade
Number and Value of Venture-Backed IPOs in the U.S.
Number of IPOs
IPO Value ($B)
* Base Year 1998 = 100
Sources: Qatalyst Partners, Securities Data Company (All U.S. venture-backed IPOs of > $10MM
from 1978 through 1991)
Dow Jones VentureSource (All U.S. venture-backed IPOs from 1992 through December 31, 2008)
6

7. The Recent Realities of Venture-Backed M&As
and IPOs
Longer Time to IPO and M&A
Median Age at IPO
4.5 9.6
Years Years
1998 2008
Median Age at M&A
3 6.5
Years Years
2008
1998
Source: Thomson Reuters, Dow Jones VentureSource
7

8. The Death of the Under $50M IPO
100
90
Transactions Raising $50M+
80
70
60
Percent of
50
Total IPOs
40
30
20
Transactions Raising Less Than $50M
10
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008*
80% of IPOs 20% of IPOs
Smaller than $50M Smaller than $50M
*Data Includes Corporate IPOs as of 10/31/08. (Excludes Funds, REITs, SPACs and LPs).
Source: Dealogic, Capital Markets Advisory Partners
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9. NVCA 4-Pillar Plan to Restore Liquidity in the
U.S. Venture Capital Industry
Job Creation
Innovation
I III
II IV
Ecosystem Tax
Enhanced Regulation
Partners Incentives
Liquidity
Paths
VC Industry U.S. Government
9

10. NVCA Plan: Pillar I – Ecosystem Partners
Job Creation
I-Banks
Innovation
VC Firms Buy Side
Ecosystem
I III
II IV
Partners
Entrepreneurs Exchanges Ecosystem Tax
Enhanced Regulation
Partners Incentives
Liquidity
Paths
Accounting
Law Firms
Firms
VC Industry U.S. Government
10

11. I
A Vacuum Exists for Small, Medium-Size Company IPOs
Implicit Post-IPO Company Valuation
($MM)
Boutique banks needed to
help cover unserved areas
$500
Would You Consider a
Boutique I-Bank To Be the
$400 Lead Book Runner for
Going Public on a U.S.
Stock Exchange?*
$300
NO MAN’S LAND
$200 32% 32%
No Not Sure
36%
$100 Yes
IPOs not
Appropriate
$0 * Source: DCM Analysis /
$25 $50 $75 $100 Survey of Venture-Backed
Companies, 2009 –
Size of IPO Offering ($MM)1 Participants (N) = 108
21st Century Versions of “4 Horsemen” Required
: Assuming 25% of Company Sold in IPO
1
11

12. Major I-Banks and Big 4 Accounting Firms I
Dominate U.S. IPOs
Recent VC-Backed IPOs
Nov. 2007 Feb. 2009
IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO IPO
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
I-Bank
at IPO
Audit Firm
at IPO
Investment Bank Audit Firm
IPO Managed by Major I-Banks Traditional Big 4
IPO Co-Managed by Boutique and Major I-Banks Traditional Non-Big 4
IPO Managed by Boutique Bank Only
15 Out of 21 Recent IPOs Led by Major I-Banks
and Big 4 Accounting Firms
Source: NVCA, Thomson Reuters
12

13. I
Accounting Firms Examined More Closely
NVCA Recommends Use of New Terminology “The Global Six” in
Describing Major International Accounting Organizations Qualified to
Support Venture-Backed Portfolio Companies
The Global Six
Deloitte LLP KPMG LLP
● ●
Ernst & Young LLP PricewaterhouseCoopers LLP
● ●
Grant Thornton LLP BDO Seidman LLP
● ●
Recent Research Performed by Capital Markets Advisory Partners
(an Independent Advisory Firm) and Validated by the Above Six Firms, Shows
All Six Organizations Have Created Global Accounting Networks Operating in
More than 90 Countries Worldwide.*
* Source: “Which Audit Firms are Accepted by Wall Street?
A Reference Guide by Capital Markets Advisory Partners, 2009, Version 1.0
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14. I
NVCA Promoting Alternate Ecosystem Partners
Investment Banks Accounting Firms
NVCA Organizing Workshops NVCA Meeting with “Global Six”
● ●
With Boutique Banks and Large Accounting Firms to Discuss
Facilitate I-Banks to Identify and Address Needs of VC-backed Companies
Needs of Emerging Growth and Ways To Provide Better
Companies Worldwide Support
NVCA Encourages Joint Book NVCA Encourages Obtaining
● ●
Running (Major Bank and Bids From Global Six and Non-
Encourage Boutique Bank Partnership) with Global Six Accounting Firms as
Fee Sharing as a Desirable Desirable Practice in IPO
Practice Planning
NVCA Actions Can Create More Competitive Ecosystem
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15. I
Other Ecosystem Partner Recommendations
I-Banks and VCs need to cultivate and
●
nurture new buyers / funds
specializing in venture IPOs
Accounting Firms encouraged to
●
provide lower-cost services to IPO
candidate portfolio companies
15

16. NVCA Plan: Pillar II – Enhanced Liquidity Paths
Job Creation
Innovation
I II III IV
Ecosystem Enhanced Tax Regulation
Partners Liquidity Incentives
Paths
VC Industry U.S. Government
16

17. II
Current Liquidity Mechanisms
Public
Sellers Current I-Banks Market Buyers
(Portfolio Companies)
(Institutional/Strategic)
Too Many Public Market Jitters
Restricted Analyst and
● ●
●
Companies Below I-Banker Collaboration Short Selling Increases
●
Critical Mass Market Volatility
Undergoing Massive
●
Too Few Organizational Changes
●
Minimum Bite Size
●
Transformative
Due Diligence Burden
Companies ●
Distribution System Is Broken
17

18. II
Enhanced Liquidity Mechanisms
In Addition to Major I-Banks we Need Innovative Boutique Banks
●
Serving Emerging Growth Companies
Use of New Private Market Platforms
●
– InsideVenture
– PORTAL Alliance (NASDAQ) Enhancements
– SecondMarket
– Xchange
– Other
Additional Use of Global Financing / Fundraising and International
●
Stock Exchanges
18

19. Enhanced Liquidity Mechanisms – Example
II
Public
Sellers New Liquidity Platforms Market Buyers
(Portfolio Companies)
(Institutional/Strategic)
VC-Backed Private Market Platform
●
Access to Long- Pre-Screened Deal Flow
● ●
Enforced Membership Criteria
●
Term Investors Efficient Due Diligence
●
Last Round of Financing $20-200MM
–
Accelerated Fund
●
Increased Visibility
Seeking to Go Public in 6-18 Months
– ●
Raising In-House Vetting Process,
●
Including Company Information
Portal, Conferences
New Platforms Will Increase VC Ecosystem Liquidity
19

20. NVCA Enhanced Liquidity II
Mechanism Recommendations
II. Portfolio Companies III. Pro-Active M&A
I. Liquidity Platforms
• Raise Rounds From • Venture Firms
• Venture Firms
Global Financing Encouraged to Pro-
Encouraged to Use
Sources actively Explore M&A
Enhanced Liquidity
Roll-Up of Smaller
Mechanisms Such as • Explore Global M&A
Portfolio Companies
InsideVenture and • Explore IPOs on Intl.
to Achieve IPO
Others Stock Exchanges
Critical Mass
• Consider Longer Lock-
Ups to Increase
Demand for Venture-
Backed IPOs
20

21. NVCA Plan: Pillar III – Tax Incentives
Job Creation
Innovation
I II III IV
Ecosystem Enhanced Tax Regulation
Partners Liquidity Incentives
Paths
VC Industry U.S. Government
21

22. III
NVCA Pro-Growth Taxation Recommendations
New Preserve
Adopt New Tax Incentive to
●
Keep Long-Term Capital Gains Tax
●
Stimulate IPOs Rate Globally Competitive
One Time Only
–
Preserve Meaningful Differential
●
10% Capital Gains Tax Rate for IPO Between Ordinary Income and
–
Purchaser and Investors Long-Term Capital Gains Tax Rates
Only Applicable for Holding Periods >
–
Promote Tax Incentives for Venture
●
2-3 Years
Capital Investments of Certain
Consider a Longer Holding Period for Types and Sizes (e.g. Cleantech,
●
Long-Term Capital Gains Life Sciences)
Special IPO Program Will
Increase Government Revenues
22

23. NVCA Plan: Pillar IV – Regulation
Job Creation
Innovation
I II III IV
Ecosystem Enhanced Tax Regulation
Partners Liquidity Incentives
Paths
VC Industry U.S. Government
23

24. IV
Barriers to Going Public on U.S. Stock Exchanges
Exit Route Preference Top 3 Barriers to Going Public
# of Responses Answered as a Top 3 Issue
and Expectation
(Participants = 108)
(n=108)
Compliance Requirements
(Sarbanes-Oxley, Audit, Governance)
M&A
Increased Volatility in the Public Markets
M&A Better Alternative
(Faster Process, More Liquidity)
Investment-Banking Related Issues (Analyst
Coverage, Requires High Rev Threshold)
Transaction Costs of Going Public (Legal,
Banker Fees, Non-Compliance Related Costs)
IPO
Higher Perceived Litigation Risk from
U.S. Investor Base
Other
Current Regulation Has a Major Impact on How
Emerging Companies Consider their Exit Route
Source: DCM Analysis/Survey of Venture-Backed Companies, 2009
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25. IV
Uncoordinated Regulations Severely Harm
Small Companies
Regulations Original Intent Unintended Impact
Reduce Fraud Prohibitively Expensive for Small Companies
● ●
Sarbanes Restore Confidence Extended Time to IPO
● ●
Oxley M&A More Attractive
●
Eliminate I-Bank Conflict Sell Side Analyst Exodus
● ●
“Spitzer of Interest Reduced Analyst Coverage and
●
Decree” Aftermarket Support
Equal Information Access Communication Gap Grows Between Small
● ●
Reg. Fair for All Investors Caps and Potential Buyers
Disclosure
Faster Development of Restrictions Limit Usefulness
● ●
Rule 144A Private Placements
Regulations Need Updating to Eliminate
Unintended Consequences
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26. IV
NVCA Recommendations for Regulatory Changes
Pre-IPO Post-IPO Private Placement
• 144A – Expand Definitions of
• Permit À La Carte • Suspend Minimum Market Cap
Qualified Institutional Buyers
Disclosure System Requirements
• 144A – Relax Requisite Holding
• Permit Confidential • Prohibit Short Sales of Newly
Periods and Volume
Registration Filings Issued Company Shares for at
Restrictions
Least 12 Months
• Phase in SOX 404
• NASDAQ/Portal Alliance – Open
Requirement For Small • Expand Usage of Form S-3 to
It Up to Private Companies and
Companies Enable Offerings Beginning 90
Accredited Investors
Days Post IPO
• Permit Research Analysts to
Better Collaborate with Both • Eliminate Restrictions on Use of
the Issuer and Investment S-3 for Certain Primary Offerings
Bankers During the IPO of Non-accelerated Filers
Process • Revise Requirement
• Relax Financial Statement for Obtaining Shareholder
Requirements Approval to Sell Securities Below
Market or Book Value
• Educate CFOs on Reg FD
Restrictions and Allowances
NVCA Requests Full SEC Review of Recent Laws
to Streamline Small Company IPO Process
26

27. NVCA 4-Pillar Plan Summary
Job Creation • Request Full SEC Regulatory
• Stimulate Ecosystem
Review to Streamline Small
Competition : I-banks
Innovation Company IPO Process
(Majors/Boutiques), Law
• Eliminate Harmful Spitzer
Firms, Acctg. Firms
Settlement Provisions
(Global Six - Lower
• Relax SOX 404 Compliance
Costs)
I II III IV Restrictions and Permit
• Encouraging Joint Book
Optional Extended Lock-ups
Running with Shared Ecosystem Enhanced Tax Regulation
• Expand usability of NASDAQ
Economics Partners Liquidity Incentives
PORTAL Alliance to private
Paths
• Cultivate New Buyers /
companies and accredited
Funds for IPOs
investors
VC Industry U.S. Government
• Adopt New Tax Incentive to Stimulate IPOs:
• Use New Platforms for Linking Buyers and Sellers
One Time Only
(Like InsideVenture)
• Keep Long-Term Capital Gains Rate Competitive
• Encourage Use of Global Funding Sources for New
Rounds, M&A and IPOs • Promote Tax Credits for VC Investments of Certain
Types/Sizes (e.g. Cleantech)
• Utilize Pro-Active M&A to Achieve Critical Mass
• Consider Longer Holding Period for Long-Term capital Gains
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28. NVCA Expresses Its Appreciation
Harry W. Kellogg, Jr., Silicon Valley Bank
The NVCA Board of Directors ●
●
Stan Lapidus, Helicos
Hassan Ahmad, Sonus Networks ●
●
Bob McCooey NASDAQ
Mike Brooks, Venrock ●
●
Michael Millman, JP Morgan
Stuart Cable, Goodwin Procter ●
●
Chuck Newhall, NEA
James L. Callinan, RS Investments ●
●
Duncan Niederauer, NYSE Euronext
Frank Currie, Partner, Davis Polk & Wardwell ●
●
Sandy Robertson, Robertson Stephens
Scott Cutler, NYSE Euronext ●
●
James D. Robinson III, RRE Ventures
Ash Dahod, Starent Networks ●
●
Bill Schnoor, Goodwin Procter
Mona DeFrawi, InsideVenture ●
●
Antoinette Schoar, MIT
Paul Deninger, Jefferies & Co. ●
●
Larry Sonsini, Wilson Sonsini Goodrich & Rosati
Susan Page Estes, Global VC Coverage, UBS ●
●
AG David Topper, JP Morgan
●
Irwin Federman, USVP
●
Brian Truesdale, Deutsche Bank
●
Leslie Wolff Golden, Ridgewood Capital
●
David Weild, Markets Advisory Partners
●
Bob Grady, The Carlyle Group
●
Thom Weisel, Thomas Weisel Partners
●
Bill Hambrecht, W.R. Hambrecht + Co.
●
Rian Wren, Neutral Tandem
●
Felda Hardymon, Harvard Business School
●
Thanks to DCM, Highland Capital Partners, the NYSE
and Wilson Sonsini for their generosity in hosting the
Blue Ribbon dinners
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29. Thank You
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