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1 The dot-com boom caused too much LP money to come into VC
Source: Prequin. Includes all LP investment into US VC funds with IT & Digital Media focus. Excludes funds with hardware & nanotech focus, non-$USD funds, funds with undisclosed amounts, & funds without first close 4
$3 $5 $7
$12
$31
$50
$26
$8 $6
$13
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Commitments from LPs to U.S. Tech VC funds ($B)
This in turn caused too many VCs to enter the market
Source: Prequin. Includes all LP investment into US VC funds with IT & Digital Media focus. Excludes funds with hardware & nanotech focus, non-$USD funds, funds with undisclosed amounts, & funds without first close 5
33 38
66 77
109
163
90
67
49
68
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
No. of funds raised by U.S. Tech VC firms
2
As a result, the startup ecosystem became over-capitalized
Source: PWC/NVCA MoneyTree Report 6
$250 $550 $628 $1,435
$7,465
$11,232
$1,150 $328 $400 $482
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
First institutional money raised by Internet Co's ($M)
3
1997 1998 1999 2000 2001 2002 2003 2004
Exit values of VC backed co's ($Bn)
M&A trade sales IPOs
1997 1998 1999 2000 2001 2002 2003 2004
No. of VC backed co. exits
M&A trade sales IPOs
The over-investment was followed by a period of greatly reduced exits
Source: Thomson Reuters 7
$42 $27
$178
$142
$40 $32 $38
$92 273 268
611 537
404 392 369
503
4
The math is simple …
8
LP money
# of VCs
Exits (#, value)
VC fundings (deals, size, value)
Poor performing asset class 1999-2007 DUH. =
There are 50x more Internet users today (33% of world population)
Sources: U.S. Bureau of the Census, World Bank. As of Q2 June 2012. 11
44
411
1,019
2,019
2,406
1995 2000 2005 2010 2012
World Internet users (M)
1
NOW 1995
Online speeds are over 180x faster
Source: Akamai ‘s State of the Internet Q1 2014 12
56 Kbps modems
10.5 Mbps average U.S.
Internet connection
speed!
2
People are mobile: connected everywhere, all the time
Source: 2014 Statista forecasts 13
• Personal
• Location aware
• At point of purchase
US smartphone users
164m Up 13.4% from 2013
US tablet users
119m Up 20.5% from 2013
3
Everybody is socially connected driving viral growth at faster rates
14
Monthly active users 255M
Monthly active users 1.3B+
Global registered members 300M+
Hours of video watched each month by 1B+ users 6B+
4
We all have credit cards on file with a single click to purchase
Sources: eMarketer, WSJ 15
Global ecommerce spend $1.5 trillion 1 billion
Digital shoppers worldwide
The Apple app ecosystem alone estimated to be $35 billion in 2014 (from $0 in 2008)
5
• Education (remote learning)
• Healthcare (doc on demand)
• Defense (drones)
Economic pressures + improved telepresence will transform industries such as …
16
6
Industry right sized to pre dot-com levels
Source: Prequin. Includes all LP investment into US VC funds with IT & Digital Media focus. Excludes funds with hardware & nanotech focus, non-$USD funds, funds with undisclosed amounts, & funds without first close 17
$3
$50
$16
$9
$16
1995 2000 2005 2010 2012
Commitments from LPs to U.S. Tech VC funds ($B)
33
163
74
50 65
1995 2000 2005 2010 2012
No. of funds raised by U.S. Tech VC firms
7
In fact, FLAG Capital estimates the number of active tech VCs is less than 100
Source: Thomson Venture Economics, NVCA Yearbook 2013, FLAG internal analysis 18
441
119
75 86
2000 2005 2010 2012
Number of active U.S. VC firms
Via FLAG Capital - “active” defined as making at least $1 million in venture investments per quarter for 4 quarters in a given year
Think about it …
20
50x users, 180x bandwidth, 6x time spent online
Mobile, social, credit-card ready
LP money, active VCs
Global economic pressure
Amazing opportunity set for VC for 2010-2020 DUH. =
Entrepreneurs need less capital to start a company
22
$5m
$500k
$50k $5k
1995 2005 2010 2014
Technology Drivers
Open Source
Cloud + AWS
Developers Start Companies
99% reduction
1
• Angels
• Incubators / Accelerators
• Seed funds
• VCs
• Crowdsourcing
With less $$ required there are many more sources from which to raise money
23
2
Entrepreneurs expect much more transparency
24
Fred Wilson AVC
Chris Dixon Chris Dixon
Brad Feld Feld Thoughts
Mark Suster Both Sides of the Table
Ben Horowitz ben‘s blog
Josh Kopelman Redeye VC
Bryce Roberts Bryce Dot VC
Jeff Bussgang Seeing Both
Sides
Bill Gurley Above the
Crowd
Manu Kumar K9 Ventures
3
How important is blogging / transparency? 52% say critical to VC decision. 96% prefer it
Source: Upfront Ventures Survey data 25
96%
52%
44%
4%
Essential or important Nice to have Negative, not wanted
• Servers
• Routers
The plumbing & infrastructure phase was & is dominated by Silicon Valley
26
• Switches
• Databases
• Browsers
• Search
4
But increasingly there have been regional successes in monetizing the web at a higher layer (the three C’s)
27
• Content • Commerce • Communications
4
Seed Stage
Early Stage
Later Stage
The LP market (led by Cendana Capital) has started to recognize the value of the seed stage VC market
29
$50M $150-300M $500M+
Many Great Emerging VC Funds
5
But LP money has largely becoming concentrated in Growth VC funds (> $500m)
*Q1 2014. Source; Q2 2014 PitchBook US Venture Industry Data Sheet 30
5
39% 35% 43%
67% 59%
26%
66%
2008 2009 2010 2011 2012 2013 2014*
Share of VC $ funds raised > $500M
Represents only 8% of total funds raised
This bifurcation has led to a gap in the traditional VC A/B round market
31
Seed Stage
Early Stage
Later Stage
$50M $150-300M $500M+
Market Gap
5
Yet in the past 30 years, Traditional Early-Stage VC has out-performed other stages 2/3 of the time
Source: Cambridge Associates Includes: data from 1,470 funds from 1981-2012 32
9%
25%
66%
Multi-stage
Late-stage
Early-stage
VC Annual Fund Performance
Big market shifts: the VC industry is changing
33
Funding sources
Transparency / operation experience
New competitive dynamics in VC =
Capital to start, age of founders
Regional successes (tech & VC)
Concentration of LPs in “mega-funds”
Entrepreneurs want thought leadership as well as operational experience
Source: Upfront Ventures Survey data 35
Important or very important when choosing a VC
34%
47%
49%
52%
60%
67%
68%
70%
70%
87%
87%
Location
Name / firm achievement
Access to portfolio network
Transparency (blog or public voice / opinion)
Recruiting support
Ability to help with access to customers
M&A support
Ability to attract other VCs
Ability to help with marketing your company
Industry experience / thought leadership
Operational experience
Less Important
1
36
Seller Buyer
• Distributors
• Physical locations
• Brokers Cutting Out
VCs encourage all of their portfolio companies to “go direct” to consumers
• Blogging • Social media • Video • Teaching
Modern VCs have used the same “direct to customer” tools for competitive advantage
37
Direct to our customer (entrepreneurs)
Thought leadership > old boys club
More effective for volume
2
• Boards meet 6-8 times per year
• Mentor, decide key issues & replace CEO if necessary
• While boards play a vital role, it’s clear they can’t solve all problems
The old VC model relied mostly on “VC knows best” & board interaction
38
• More time
• Closer in skills
• Recent methods
We know that kids learn much better from peers than parents
39
• CEO summits
• Expert universities
• Business support
• Tools
• Incentives
New VC “platforms” recognize the importance of peer learning, participation
40
Some Best in Class Platforms
3
• CEO & CTO summits • Market research / internship projects • Stock swaps • Content library • Easy access to “Second Round Capital” 41
42
• CEO workshops
• University style hands-on learning from key industry figures
• Video sessions for further use
43
Leading funds putting big investments into operational support staff
Some Best in Class Services
4
In-house tools & resources
• Recruiting
• PR
• Designers, engineers & execs
• Business development 44
• Hands-on support teams for design, recruiting, marketing & engineering
• Startup Lab workshops
• Events / networking conferences 45
46
• Accounting Services
• Education
• Blogging / Marketing Services
• Inside Sales
• Recruiting
• Market Research
Example Services Provided
47
One of most important differentiators is domain knowledge & providing industry access for deals
Some Best in Class Industry Networks
5
• Best domain knowledge & relationships in ad sector
• CEO summits with key industry players
• Ad Agency Days where portfolio presents to buyers of Ad Tech 48
• Holds “Future of TV” summits with key industry leaders
• Blog & provide thought leadership on: Online Video, Ad Tech, Mobile & SaaS
• Strategic LPs / Portfolio meetings 49
• Took an early market position on “big data” (IA = information arbitrage)
• Deep financial services relationships / knowledge
• Executive relations at financial data companies like Reuters, Bloomberg 50
In summary: The market expects more than money. VCs can’t be stock pickers. They must invest in platforms not their pocketbooks.
51
Operational experience
Thought leadership & transparency
Peer-to-Peer platforms
Operational support on recruiting, accounting, biz dev, design
Industry insights / relationships
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