NextGen VCs After the Storm

1
NextGen VCs After the Storm

• PolyTechnos Venture-Partners GmbH
• Third Annual Meeting CEO Day Berlin06
  November 2001
• Kenneth P. Morse, Senior Lecturer
• and Managing Director
• MIT Entrepreneurship Center

2
Desired Outcomes of this Presentation

• Provide a basis for a stimulating discussion
• Respond to your questions
• End on time, so we can enjoy our luncheon
  (and networking).

I want to express special thanks to Jesse
Reyes, Venture Economics and John
Taylor, NVCA for their permission to use their
excellent data, analysis, and presentations from
VentureXpert, the Venture Capital Institute, and
the DRI-WEFA study which were just released in
the USA.
3
Proposed Outline

• Our Mission Focus
• Past Business and Venture Cycles
• Current Scene Trends in Start-ups and VC
• Future Outlook

4
MIT Entrepreneurship Center Mission
To train and develop leaders who will make high
tech ventures successful
I want you to be the premier global center for
entrepreneurship, and to be recognized as
such. We must not only be the best. We must
also serve as a model for others and ensure that,
together, we all make a significant global impact
in this vital field.
MIT President Charles M.
Vest, July 1996
5
Why Focus on High Tech?

• Continuous creation of new, technology-based
  enterprises enables great leaps forward.
• Rising living standards underpin democracy.
• At MIT, we believe our distinctive competence is
  forging innovations in Science, Engineering,
  Management to achieve revolutions, not evolution.

6
To Compete Successfully
MIT startups must attack global markets.
To teach global high tech entrepreneurship
effectively, we need a network of partners

• University of Cambridge (UK)
• The Cambridge Network
• CEC
• Ireland (3 universities)
• Taiwan (3 universities)
• Germany?

7
Proposed Outline

• Our Mission Focus
• Past Business and Venture Cycles
• Current Scene Trends in Start-ups and VC
• Future Outlook

8
The Inevitable Business Cycle
In times of great commercial prosperity there
has been a tendency toward over-speculation on
several occasions. The success of one project
generally produces others of a similar kind.
Popular imitativeness will drag a community too
anxious for profits into an abyss - Charles
Mackay, 1841
9
The Impact of US Venture Capital
DRI-WEFA Study Commissioned by NVCA

• Venture firms now account for
• 7.9 million employees
• Annual revenues of 1.56 trillion,
• These figures represent
• 6.1 of US payroll
• 14.0 of US GDP
• 7.9 of US company revenue.

Source DRI-WEFA (analysis as of 8/2001)
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Key Findings - Preliminary

• For every dollar invested in 1970-1999, there was
  9 in revenue during 2000
• For every 21,627 of venture capital investment
  in 1970-1999, there was one more job in the year
  2000
• Not bad for an industry which was
• lt1.0 in 1970-1995
• 2.1 in past 5 years

Source DRI-WEFA (analysis as of 8/2001)
11
The VC Industry has Grown Dramatically in the
Past Few Years
Source VentureXpert Database by VE NVCA
12
Venture Capital Fundraising Continues at a Strong
Pace
This does not include money available for
investment by Corporate Venture groups.
Source VentureXpert Database by VE NVCA
13
The US Venture Industry Has Grown
Source 2000 NVCA Yearbook
14
How Big is Big in a Venture Fund? Have VCs
Abandoned Seed?

• 2000 Funds by Size0-25M
  10025.1M-50M 8050.1M-250M
  213250.1M 106

Source VentureXpert Database by VE NVCA
15
Corporate Venture Capital Groups Have Become Very
Involved
Source VentureXpert Database by VE NVCA
16
Corporate VC Groups are Involved in more than ¼
of all Deals
Source VentureXpert Database by VE NVCA
17
Recent Quarters Portend a Return to Traditional
Activity Levels
Source VentureXpert Database by VE NVCA
18
2000 IPOs Edge Out 1999 Record Levels Despite a
Bouncy Road
Source VentureXpert Database by VE NVCA
19
Acquisitions are an Increasingly Important Exit
Strategy
Source VentureXpert Database by VE NVCA
20
Why Invest If You Cant Find the Exit Door?
IPO Markets are Dormant
Source VentureXpert Database by VE NVCA
21
Acquisition Markets Have Slowed Down Too
These are Increasingly Important

• The currency of the average NASDAQ company has
  lost 50.4 in the past year.
• Most acquirers of venture backed companies are
  publicly-traded high technology companies (often
  themselves venture backed).

22
Average Early and Seed Stage Round Sizes Have
Crested
Source VentureXpert Database by VE NVCA
23
Venture Capitalists Continue to Fund Early and
Seed Stage Companies Future Pipeline
Source VentureXpert Database by VE NVCA
24
First Venture Rounds into Internet-Related
Companies Continue
Although at a Much-Reduced Level from 2000
Source VentureXpert Database by VE NVCA
25
Scaling the Industry Growth in VC Principals
Has Not Kept Up With Growing Fund Sizes
Source VentureXpert Database by VE NVCA
26
Venture Principals are Busier than Ever!
Source VentureXpert Database by VE NVCA
27
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
28
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
29
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
30
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
31
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
32
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
33
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
34
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
35
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
36
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
37
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
38
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
39
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
40
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
41
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
42
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
43
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
44
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
45
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
46
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
47
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
48
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
49
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
50
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
51
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
52
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
53
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
54
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
55
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
56
US Venture Capital Partnership Returns Versus
Public Market Returns Funds Formed 1969-2000
(quarterly returns)
Source Venture Economics
57
Five Year Performance Trends US Venture vs Buyouts
Source Venture Economics
58
US Private Equity Performance Benchmarks US
Limited Partnerships Formed 1969-1999 Investment
Horizon Returns Net to Investors as of 9/30/2000
Source Venture Economics
59
US Limited Partnerships Formed 1969-2000 Investmen
t Horizon Returns Net to Investors as of
12/31/2000
Source Venture Economics
60
Companies Receiving First Venture Round (Series
A) During Last Downturn (1/1990-6/1992)

• Artisoft
• Starbucks
• Intuit (FKA ChipSoft)
• McAfee
• Xpedite
• Palm Computing
• Cutter Buck

• RF Micro Devices
• eFax.com
• Shiva Corporation
• Wind River Systems
• FTP Software
• CheckFree
• SPSS

61
Proposed Outline

• Our Mission Focus
• Past Business and Venture Cycles
• Current Scene Trends in Start-ups and VC
• Future Outlook

62
Current Scene B2B Back to Basics

• The Laws of Gravity Were Never Repealed
• Entrepreneurs need to have outstanding
• Team
• Technology
• Value Proposition
• Market
• Customers
• Applies to VCs as well

63
Entrepreneurs Building Your Company

• Need an A Team 3K experience
• Serious Technology sustainable advantage
• Solve an important, valuable problem
• For clients who have money
• Who want to pay well
• With a short sales cycle
• And will buy more, soon

YOUR VALUE PROPOSITION MUST BE COMPELLING,
QUANTIFIABLE, PROVEABLE, REFERENCEABLE, AND
EASILY EXPLAINABLE
64
Our Message to Entrepreneurs Selecting Your
Financial Partners

• Seek True Value Added Blue Money
• Operating Experience
• Rolodex/Network
• Awesome Portfolio (in your space)
• Cool Limiteds (in your space)
• Deep pockets / courage to stay the course
• Keep Realistic Expectations
• Time to Market
• Revenue growth
• Valuations

65
Entrepreneurs Funding Many Options

• Your Personal Funds
• 3F Friends, Family, and Fools
• Personal Credit Cards and Other Borrowings
• Business Angels
• Venture Capital
• Corporate Direct Investment
• Venture Leasing

• Mezzanine Financing
• Merger and Acquisition
• Initial Public Offering
• Secondary/Follow-on Public Offering
• Private Placements Debt Equity
• Buyout/Acquisition Financing
• Corporate Debt

66
Proposed Outline

• Our Mission Focus
• Past Business and Venture Cycles
• Current Scene Trends in Start-ups and VC
• Future Outlook

67
Future Outlook After the Shakeout

• The superficial VC gamblers are dying or dead.
• A line of bull .ppt is no longer enough. DAD
  gtgt MBBB
• The number of MIT spin-offs and 50K teams have
  not decreased significantly.
• Serious entrepreneurs, angels, and VCs are
  quietly and carefully moving forward.

• This is a great time to be starting a company
• Expectations and time horizons are realistic.
• Recruiting top talent is easier.
• Office space is available, at more reasonable
  prices.