Invention Meets Investment

1
Invention Meets Investment

• Observations on the Relationship Between
  Research, Venture Capital and the Current Market
  Ecology

2
The IT Industry
3
Future Growth for the IT Industry?
Nominal, percent
?
1980-1995
1995-2000
2000-03
Next 3-5 years
4
IT Spend Will Lag Economy for Years

• Annual percent change

IT capital spend
GDP
Actuals
Projected
5
IT Spend Is Now Tied to the Economy
Billions percent

• Nonresidential fixed investment in equipment and
  software

100
30
69
227
428
877
Other equipment
Transportation equipment
Industrial equipment
Other information processing equipment
Communications equipment
Software / Hardware
IT spend as of total capital equipment spend
9
17
22
32
39
6
Is Double Digit Growth in IT Spend OVER?!
CAGR nominal dollars
Spend growth
Hardware and software
All IT equipment
Potential long-term CAGR of 5-7
GDP
Non-IT capital equipment
7
International Arbitrage

• Number of science and engineering graduates
• Thousands

U.S.
China
India
Caribbean
Mexico
Philippines
Ireland
Malaysia
Egypt

• Quarterly wage costs
• U.S.

8
IT - A Smokestack Industry???

• Significant Consolidation
• Top 10 companies control 58 share of IT wallet
• Shrinking White Spaces
• Legacy investment dominates buying decisions
• Ante (cost of entry) Keeps Rising
• Encumbered by history
• Higher Value Jobs Moving Offshore
• Exit Values Flat to Declining
• IPO market is soft
• Fewer MA buyers competition down

9
Research and Development
10
TOTAL U.S. RD EXPENDITURES
1960
1970
1980
1990
2000
11
Academic Research
12
Average Annual RD Growth
1960-2000
13
Academic Research by Field
14
Reverse Brain Drain ?
15
The Venture Capital Industry
16
Venture Investments by Year
Q1-Q3
17
Dollars per Investment
18
Venture Capital Issues

• Supply Outpaces (real) Demand
• 1 basis point of 16 trillion is 1.6 billion
• Is the IT Industry Mature?
• Is there a new wave coming?
• Mainframe, Minis, PCs, Internet, Wireless
  Consumer??
• Or is the rising tide over?
• Is Biotech Over the Hump?
• Historical industry-wide returns have been dismal
• Move From the Cake to the Ingredients?
• Capital Efficiency is a Big Concern

19
A Venture Capital Strategy
20
Private Equity Dumbbell Theory
Seed
B Round
Buyout/Consolidation
A Round
Mezzanine
Invention Innovation Implementation
Production Consolidation
21
Globalization Response
US
EP Venture Focus
Invention
Innovation
Implementation
Production
Global
Advances in technology proceed from advances in
science W. Brian Arthur
22
Responding- A Venture Strategy

• Have a clear model for what, where and how.
• Requires insight and experience
• Build tight relationships with the sources of the
  science.
• Requires deep technical understanding
• Mine those relationships for critical inventions.
• Requires continuous networking
• Commercialize those inventions into meaningful
  innovations.
• Requires extensive commercial experience
• Monetize those innovations at the right time.
• Insight and planning