The State of Venture Capital

1
The State of Venture Capital

• March 2, 2002
• John Gabbert
• Sr. Director, Worldwide Research
• VentureOne Corporation

2
Three Key Elements for a Robust Venture Industry

• Fundraising
• Investment
• Liquidity

3
Fundraising
4
Venture Capital Fundraising Healthy in
2001Commitments to Venture Capital Funds
Funds Raised (B)
Source VentureOne
5
But Momentum is SlowingCommitments to Venture
Capital Funds
Funds Raised (B)
Source VentureOne
6
Fundraising Far Outpaces Investment in
2001Fundraising vs. Amount Invested
Amount Invested (B)
Source VentureOne
7
Fundraising Summary

• Commitments to venture capital were flat in 4Q01
  however, 2001 fundraising was still well above
  the norm.
• Fundraising is becoming more difficult,
  especially for newer or unproven funds.
• Over half of VC dollars are now in funds greater
  than 500 M.
• Greatest amount of VC money in history available
  to invest in entrepreneurship.

8
Investment Overall
9
2001 A Sharp Contrast to 2000s Boom Equity
into Venture-Backed Companies
Amount Invested (B)
Number of Deals
Source VentureOne
10
Investment Levels Off at Years End Equity into
Venture-Backed Companies
Amount Invested (B)
Number of Deals
Source VentureOne
11
Median Round Size Gets a Boost in 4Q01Median
Amount Invested Per Round
Median Amount Invested (M)
Source VentureOne
12
Positively Affecting Later-Stage Rounds Median
Amount Invested by Round Class
Median Amount Invested (M)
Source VentureOne
13
Investment Shifts to Second Later RoundsDeal
Flow by Round Class
of Deals
Source VentureOne
14
IT Dominates, Healthcare Recaptures Investor
InterestEquity Investment by Industry Sector
of Investment
Source VentureOne
15
IT Investment Still Falling Equity Investment
in Information Technology Companies
Amount Invested (B)
Number of Deals
Source VentureOne
16
Communications, Software Are Cornerstones of
ITIT Investment by Sector
of Internet Investment
Source VentureOne
17
Investment Valuations
18
2001 Valuations Fall Below 1999 LevelsMedian
Premoney Valuation by Year
Median Premoney Valuation (M)
Source VentureOne
19
Valuations Recover Somewhat in 4Q01Median
Premoney Valuation
Median Premoney Valuation (M)
Source VentureOne
20
Later-Round Valuations Boost Overall
NumbersMedian Premoney Valuations by Round Class
Median Premoney Valuation (M)
Source VentureOne
21
Healthcare Valuations Up Significantly Median
Premoney Valuations by Industry
Median Premoney Valuation (M)
Source VentureOne

22
Investment Regions
23
Texas Edges Out Boston for 3 Spot2001
Regional Investment in the US
Source VentureOne
24
Bay Area Investment StabilizesInvestment in Bay
Area Venture-Backed Companies
Amount Invested (B)
Source VentureOne
25
Equity Financing Summary

• Equity financing into venture-backed companies
  leveled off in 4Q01.
• Overall equity investment in 2001 was still the
  third highest amount on record.
• Valuations and median round sizes recovered
  slightly at years end.
• Early-stage venture financing has fallen more
  rapidly than later-stage.
• The time between financing rounds is expanding.

26
Liquidity
27
MAs Continue to SlipTransactions and Amount
Paid in MAs
Amount Paid (B)
Number of Transactions
Source VentureOne
28
IPO Liquidity Up Marginally in 4Q01 Deals and
Amount Raised Through IPOs
Amount Raised (B)
Venture-Backed IPOs
Source VentureOne
29
Liquidity Summary

• The IPO and MA markets for venture-backed
  companies continued their dramatic declines from
  the record levels of 1999 and early 2000.
• IPO volume in 2001 was at its lowest in years.
• The amount paid in MA transactions declined
  throughout 2001, falling to the lowest level
  since 1995.
• IPO companies in 2001 were more mature, but the
  time from initial funding to MA is still
  falling.

30
Conclusions Implications

• The bad news
• Liquidity is extremely difficult
• VCs are investing much more slowly and cautiously
• Valuations are down across the board
• Many VC-funded companies will fail to raise more
  
• The good news
• Liquidity windows open and close
• VCs do have money to invest
• Expectations are much more realistic
• Those companies that succeed in raising will
  have more board involvement, better resources,
  lower costs and less competition
• Truly great companies will emerge from this period

31
More Information

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