Venture Capital Today

1

• Venture Capital Today
• Robert W. Conn
• Managing Director
• Enterprise Partner Venture Capital
• La Jolla, CA
• March 13, 2006
• Seminar Talk for the Department of Computer
  Science and Engineering, University of
  California, San Diego (UCSD)

2
About Enterprise Partners VC

• Enterprise Partners was founded in 1985 and is
  the largest venture capital firm headquartered in
  Southern California with over 1.1 billion in
  capital under management. The firm focuses on
  seed, early stage and promising later stage
  companies developing technologies and market
  solutions in both IT and the life sciences. The
  firm is currently investing its sixth fund whose
  size is 353M.
• Our partners are entrepreneurs themselves,
  having formed, run and sold multiple companies
  across a spectrum of industries. Along with a
  professional staff bringing financial, legal,
  product development, marketing and operations
  support to the firm, the partners at Enterprise
  draw on their experience and partner with our
  portfolio companies to achieve success.

3
The Purpose of Venture Capital

• To Provide High-Risk Capital to Enable
  Innovations and Inventions, Often from
  Universities and Research Institutes, to Move
  from Concept to Commerce
• To Help Create Large Economic Value for Founders,
  Management, Employees and Investors
• To Build New Companies, Create Jobs, and Help
  Ensure Economic Growth and Long Term Economic
  Prosperity

4
The U.S. Venture Capital System Has Been andIs
an Unfair U.S. Advantage How did that Happen?

• The Enabling Event The1979 Dept. of Labor
  Clarification of the Prudent Man Rule Catalyzed
  Modern Venture Capital.
• The Ruling meant the Labor Department would not
  view the allocation of a small portion of Managed
  Pension Funds in higher risk Venture Capital as
  Imprudent even if a number of firms in a VC
  fund failed.
• The Ruling Enabled Risk Capital as an Asset
  Class It Opened the Door to Pension Funds,
  University Endowments, and others for VC Firms -
  and Led to the Modern Venture Capital Asset Class
• Two Other Key Milestone Events
• The Steiger Amendment in 1978 - which Reduced the
  Capital Gains Tax from 49 to 25. This provided
  a strong financial incentive for Individuals to
  Start Companies
• The Bayh-Dole Act of 1980 - which granted Sole
  ownership of discoveries made under Federal
  Government financial support (e.g., Grant for
  Research at Universities) to the Universities,
  Non-Profits and Small Businesses where they were
  made.
• The Act permitted exclusive licensing by a
  university to enable the development and transfer
  of an invention to the marketplace for the public
  good
• The Act Provided a Strong incentive for
  universities to form research collaborations with
  industry
• It was understood that this would be a stimulant
  for the U.S. economy.

5
Venture Capital Has Been a Key Fuel for the
U.S. Economic Engine, Enabling the Translation of
Discovery and Innovation into Products and
Services, Jobs, and Successful New Businesses.

• In 1979, there were 25 VC firms that raised about
  500M for venture capital investment. In 2005,
  there were about 125 VC firms that raised and
  invested about 20B.
• Venture-Backed Companies are a Major Economic
  Stimulant and Contribute Importantly to U.S.
  Economic Competitiveness

6
Venture Capital Backed Companies Do Make a Real
Difference in U.S. Jobs and Economic Vitality and
Leadership
The Top Dozen High-Tech Companies by Market Value
(Dec. 2005)
7
Metrics in Addition to Market Cap of the
Economic Impact Of Venture-Backed Companies

• Jobs 18 of Workers in the U.S. are at
  Companies that were Original Financed by Venture
  Capital
• Payroll 24 of Payroll in the U.S. is From
  Companies that were Originally Financed by
  Venture Capital
• Implication The Economic Impact of VC-Backed
  Companies is Large, and the Jobs Pay Well

8
Venture Capital Today Recovered from the Bubble
Years and Raising and Investing 20 Billion Per
Year
Source Ernst Young / Dow Jones VentureOne
9
- Venture Capital Today is Still Adventurous
-U.S. Seed/First Round Investment over the Past
10 Years
Source Ernst Young / Dow Jones VentureOne
10
Median Deal Size is About 7 Million Across All
Rounds of Investments
10
( Millions)
Source Ernst Young / Dow Jones VentureOne
11
Southern California Is a Vibrant Place for
Venture Deals As Shown By 2005 Venture Capital
Financings
2.1 Billion Invested 10 of U.S. Total
204 Deals
Software 15
Biopharmaceuticals 16
Biopharmaceuticals 23
Software 25
Semis 15
Comm 8
Cons/Bus Products 1
Comm 11
Retailers 1
Cons/Bus Services 8
Semis 11
Other 2
Cons/Bus Products 1
Electronics 3
Med IS 2
Retail 2
Energy 1
Cons/Bus Services 7
Other 4
Med Devices 13
Health Services 3
Info Services 4
Electronics 2
Med IS 2
Info Services 3
Med Devices 12
Health Services 4
Energy 1
Source Ernst Young / Dow Jones VentureOne
12
San Diego Also Has a Vibrant Local Venture
Capital Infrastructure

• San Diego is Fifth in the U.S. in Terms of Deals
  and The Dollar Value of Venture Financings, and
  2nd in California after Silicon Valley.
• San Diego VC Financings Are About 1 Billion Per
  Year
• San Diego has More Than 20 Venture Capital Firms
  Headquartered in the Region and Many Major
  Service Providers -
• San Diegos Three Largest Venture Capital Firms
  Are
• -Enterprise Partners Venture Capital Founded
  in 1985. Capital Under Management 1.1
  Billion
• -Forward Ventures Founded in 1993.
• Capital Under Management 460 Million
• -Mission Ventures Founded in 1997.
• Funds Under Management 460 Million

13
San Diego Venture Financings in 2005 By Dollars
Invested, 60 of Deals were Life Sciences and 40
IT The Ratio is 50-50 When Measured By Number
of Deals Done
898 Million Invested
85 Deals
Biopharmaceuticals 51
Biopharmaceuticals 35
Software 16
Software 26
Semis 13
Other 3
Semis 10
Med IS 2
Comm 2
Med Devices 7
Other 5
Cons/Bus Services 7
Healthcare Services2
Comm 2
Med Devices 11
Healthcare Services2
Med IS 2
Cons/Bus Services 4
Source Ernst Young / Dow Jones VentureOne
14

• Trends in the Information Technology (IT) Market
  and Some Observations for Startup Companies and
  Venture Capital
• IT includes Essentially all High Tech thats not
  Bio-based Media, Networking, Communications,
  Software, Consumer Electronics, Telecom
  Semiconductors, Computing

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Weve Entered the Era of the Digital Consumer
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Venture Capital Today and IT Startups

• Theres Always a New Wave Coming - The IT Trail -
  -
• From the Mainframe of the 60s to the Minis of
  the 70s to PCs in the 80s, and the Internet
  and Wireless/Mobility in the 90s, there
  continues to be an On-Going Revolution in the
  Markets and Products
• Globalization and the Rise of the Innovation
  Culture around the World is an Opportunity, Not a
  Threat
• Moores Law, and All it Enables for
  Semiconductor Performance, Continues with Great
  Impact on Computing, Communications, Networking
  and Storage
• Can we Build Major Value from Startup to Finish
  in a Capital Efficient Way? That today probably
  means less than 30M invested prior to Exit.
  Globalization has helped here.

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The Key Points for Startup Companies and
Entrepreneurs

• Address a Major Need In Most Areas, the Needs
  and Pain-Points are Known. So
• Provide a Distinctive and Protectable Solution
• Address a Major Market Large Markets Enable
  Large Exits!
• Identify the Customers and Insure the Solution is
  a Must Have, as Opposed to Nice to Have.
• Understand the Competitive Landscape
  Incumbents, Other Startups
• Build a Strong Team and Execution Plan, taking
  account of Capabilities and Markets Globally
• Have Strong, Early Financial Support - to Execute
  on the Product Development and Go-to-Market Plan

Venture Capital Firms Will Do Their Diligence to
Confirm the Value Proposition, and Work with
Entrepreneurs and Their Companies In Building a
Strong Team and Execution Plan
18
Summary Venture Capital Today is Alive and Well

• California Remains the Countrys Center of
  Gravity for Venture Capital and Start-Up
  Companies
• Southern California and San Diego are Vibrant
  Regions for Start Up Companies and Talent in Both
  IT and Biotech/Life Sciences
• An Academic with an Entrepreneurial Bent Can
  Create a Company and Be Successful There are
  Many Examples
• To Provide A Sense of Markets and Companies That
  We at Enterprise Partners Have Found To Have
  Compelling Stories, the Next Slide Lists Recent
  EPVC Investments Over the Past 12 Months, and the
  Following Slide is a List of My Investments Since
  Joining Enterprise Partners in July of 2002.

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Recent Enterprise Partners Investments

• 3Leaf Networks - 3Leaf Networks is developing
  the infrastructure for virtual servers in the
  enterprise data center. Santa Clara, CA
  www.3leafnetworks.com Partner Bob Conn
• Anaborex - Anaborex is an early stage
  biotechnology company developing drugs for the
  treatment of the wasting syndrome many cancer
  patients experience towards the late stages of
  their disease. San Diego, CA www.anaborex.com
  Partner Drew Senyei
• Celladon - Celladon is an exciting new
  biotechnology company focused on developing
  treatments for cardiovascular diseases.
  Celladons drug products have shown beneficial
  results in preclinical studies in reversing the
  morbidity and mortality of Congenital Heart
  Failure. San Diego, CA
  www.celladon.net Partner Drew Senyei
• DeviceScape Software - DeviceScape provides a
  software platform that enables the development of
  a broad range of wireless devices that connect
  easily, coordinate seamlessly and can be managed.
  Brisbane, CAwww.devicescape.com Partner Bill
  Stensrud
• Expresso Fitness - Expresso Fitness provides
  networked and interactive software and cardio
  equipment for the multi-billion dollar fitness
  industry. Sunnyvale, CA www.expressofitness.co
  m Partner Bill Stensrud
• Identrust - Identrust is a global identity
  solutions provider that is bank-built and
  government regulated. San Francisco, CA
  www.identrust.com Partner Carl Eibl
• Muze - Muze is the leading source of
  entertainment product information for music,
  books, films, and games. Muze content provides
  customers with detailed information about
  entertainment products. New York,
  NYwww.muze.com Partner Bill Stensrud
• Tarari - Tarari designs and produces content
  processors that accelerate and offload
  compute-intensive, complex algorithm used in
  XML/web services, network security and digital
  media environments. San Diego, CAwww.tarari.com
  Partner Bob Conn
• vMix.com - vMix is a free, global, video sharing
  online community for personal video sharing and
  brings together three communities creators,
  viewers and advertisers in a marketplace of
  content. San Diego, CA www.vmix.com Partner
  Carl Eibl
• WideRay Corp - WideRay enables the deployment
  of "proximity services", targeted, on-demand,
  on-location delivery of content, transactions,
  software, and services directly to end-user
  mobile devices. San
  Francisco, CA www.wideray.com Partner
  Bill Stensrud

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Investments Led By Bob Conn Since Joining EPVC in
July of 2002

• Pathscale, Inc. Jan. 2003. Pathscale provides
  chip and software solutions to Accelerate
  Commodity-Based Cluster Computing. Acquired by
  Qlogic in Feb. 2006
• TwinStar Systems, Inc. Dec. 2003. Metrology
  system for advanced semiconductor whole-wafer and
  in-line inspection. Shutdown in June, 2004.
• NEXX Systems Inc. April, 2004 NEXX develops
  and sells Back-End Equipment to Firms Packaging
  and Assembling Semiconductor Chips and Displays.
  Revenues of 20M in 2005 and Growing.
• Pivotal Systems Inc. April, 2004. Pivotal
  develops in-situ, closed-loop control solutions
  for etch and deposition semiconductor processes
  equipment. Exceeded 1M in Revenue in 2005 and
  growing.
• NetSift (from UCSD final EP Investment led by
  another EP partner) June, 2004. NetSift
  develops deep packet network processing
  technology for security. Acquired by Cisco in
  June, 2005.
• Nuelight Inc. October, 2004. Nuelight develops
  analog and mixed signal chip solutions for OLED
  Displays used in Handsets, Monitors and HDTV.
• 3Leaf Networks - April, 2005. 3Leaf is developing
  the infrastructure required to support both the
  scale-up and scale-out of Commodity Virtual
  Servers for major compute-intensive industry
  needs .
• Quorum Systems Joined Board Nov. 2005. Quorum
  is a fabless semiconductor company that develops
  highly integrated, multi-mode radio frequency
  (RF) transceivers in a single-chip CMOS solution
  for cell phones and converged handsets (GSM or
  CDMA plus Wi-Fi and Bluetooth).
• Ascendent Systems Joined Board Nov. 2005.
  Ascendent makes software to connect cell phones
  to a corporate PBX, enabling office-phone
  functions to be extended to Mobile Users with one
  phone number. Acquired by RIM, March, 2006
• Tarari, Inc. January, 2006. Tarari develops and
  delivers software-enabled ASIC and board-level
  solutions for advanced content inspection and
  acceleration applications that improves network
  and application performance. Exceeded 3M in
  Revenue in 2005 and growing.
• ------------
• Two Seed Investments Scoperta - Oct. 2005 (from
  UCSD) (Materials for consumer and industrial
  products) and Novowave Dec. 2005 (Digital Home
  Networking for Consumer Products.)