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The Economic Impact of Venture Capital
Prepared for the Minneapolis Foundation
April 29, 2004
Return on Investment:
The Venture Capitalist Dilemma Grid
Pre Investment Post Investment
Control
No Control
Pre Investment / Control
Pre Investment Post Investment
Control
No Control
Post Investment / Control
Pre Investment Post Investment
Control
No Control
Pre Investment / No Control
Pre Investment Post Investment
Control
No Control
Post Investment / No Control
Pre Investment Post Investment
Control
No Control
Model VC Portfolio
-3,000,000
-2,000,000
-1,000,000
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
1 2 3 4 5 6 7 8 9 10
Cash Flow HistoryDistributions
Contributions
Investment Period
Harvesting Period
$6 million commitment $18.2 million in
distributed capital 30% IRR
Agenda
Sherpa Partners Venture Capital as an Economic Engine Venture Capital Industry Regional Venture Capital Minnesota Highlights FAQs about Venture Capital
“…Americans created the phrase ‘to make money.’ No other language or
nation had ever used these words before... Americans were the first to
understand that wealth has to be created.”
Ayn Rand (1905-1982)Russian-American philosopher
“Sherpa” refers to both an ethnic group and a job description as porter, climb or trek leader found in the mountains of Eastern
Tibet.
The Term Sherpa
Venture capital firm focused on early-stage companies primarily
located in the Upper Midwest
Sherpa Partners, LLC
Co-Managers Mac Lewis, Steve Pederson and Rick Brimacomb have a proven track record as entrepreneurs, operating managers, value-added investors, and directors. Collectively, they have about 50 years of operating experience and 30 years of investment experience.
Sherpa PartnersTogether Since 1998
Seed Seed StageStage
Early Stage – Early Stage – (Sherpa)(Sherpa)
Expansion StageExpansion Stage
Late StageLate Stage
Early Adopter Customers
Early Majority CustomersEarly Majority Customers
Late Majority Customers
Innovation Customers
Friends & Family
Angels
Institutional - VCs
Public Market
Equity Financing Food Chain(Founder to Angel to Institutional Investors)
Venture Capital as an Economic Engine
Venture Capital Impact on the US Economy
Venture funded firms account for: 12.5 million jobs Annual revenues of $1.1 Trillion
Impact on economy 6.7% of US company revenue 9.7% of US payroll 11.0% of US GDP
Source: National Venture Capital Association and DRI-WEFA
Job Creation
1 job per $3,000 invested
in venture capital
Source: National Venture Capital Association
Venture Capital CreatingJobs in Minnesota
Source: National Venture Capital Association and DRI-WEFA
356,000 new jobs in Minnesota at companies with $27.5B in Revenue
Sherpa’s seven companies created 258 jobs in Minnesota and surrounding states.
Where is the Employment Growth?
Obsolete jobs will be “outsourced.”
U.S. economy will continue to gain in the service sector.
Venture Capitalists and Entrepreneurs start companies to create new jobs.
0
20,000
40,000
60,000
80,000
100,000
120,000
1960 1967 1974 1981 1988 1995 2002
Manufacturing Services
Jobs in thousands
Source: Economic Report of the President, 2004
Venture Capital Industry
Local Underwriters Jump on IPO Comeback
Star Tribune 4/26/04
“…both initial and secondary offerings have soared from a year ago.”
“…share prices increase an avg. of 16.4% in the first week… That’s good, but it’s well below the 82%, 1-week gain… enjoyed in 2000.”
Venture Capital Slows to a Trickle Star Tribune 4/27/04
“…slowest quarter in terms of deals since 1995…”
“…the largest quarterly dollar amount in two years.”
VC According to the Star Tribune
Venture Capital Slows to a TrickleStar Tribune 4/27/04
VC Awaits an IVStar Tribune 1/27/04
Coming Up Short in Biotech – VC Investment in MN Keeps Falling
Star Tribune 10/28/2003
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
$50,0001
98
0
19
81
19
82
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98
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00
20
01
20
02
20
03
$18.2 B
~ ~
$54.5 B
$105.9 B
Venture Capital Investments($ in 000s)
Source: Thomson Venture Economics
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
$50,0001
98
0
19
81
19
82
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83
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84
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00
20
01
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02
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03
$18.2 B
Fantasy
Venture Capital Investments ($ in 000s)
Source: Thomson Venture Economics
Steady Growth
Uninvested Venture Capital“Dry powder” near all-time highs
Source: SVB Estimates & Venture Economics
0
10
20
30
40
50
60
70
80
Billio
ns
$55B
$86B According to McKinsey & Co. 3/04
Regional Venture Capital
Midwest Venture Capital Industry
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
2002 Total = $1.0 B 2003 Total = $0.9 B
IllinoisMinnesotaMichiganOhioWisconsin
Dollar Amount of Invested Capital
Midwest Venture Capital Industry
0
10
20
30
40
50
60
70
2002 Total = 212 2003 Total = 163
IllinoisMinnesotaMichiganOhioWisconsin
Number of Deals – Deal Flow
Minnesota Highlights
Chances Are…
That you know someone who works for a venture backed company! Odds are better than one in ten!
MN employs 2,700,000 residents. Of that, 12.9% or 356,000 were created by
venture backed companies.
Source: PWC Money Tree, Minnesota Workforce Center
Hometown Start-Up Success Stories
MN’s LargeFortune 500 Companies
3M - $65 B Medtronic - $62 B Target Corporation - $40 B UnitedHealth Group - $40 B General Mills - $18 B Best Buy - $17 B Supervalu - $4 B
MN’s Large Technology Companies
Veritas Software Corp - $11.8 B
Retek Inc. - $415 M Computer Network
Technology - $200 M Rimage Corp - $150 M Analysts International
Corp - $70 M
*All of these MN companies are public and trade on either the NYSE or the NASDAQ. Their respective market capitalization are as of April, 2004.
Medtronic Then
Founded in 1949 by Earl Bakken and Palmer Hermundslie in Earl’s garage.
Started repairing hospital equipment before turning into an innovative medical device manufacturer.
Medtronic Now
Employer of +30,000 worldwide and generates +$7 billion in annual revenue.
Consistently voted one of the nation’s best employers.
Cornerstone of Medical Device Community.
Control Data Then
Founded in 1957 by William Norris, Seymour Cray and 11 others from Sperry Rand Univac
Started selling drum memory products before selling first computer in 1959 – first computer built primarily with transistors.
Control Data Now
1957 Control Data 1972 Cray Research 1996 Silicon Graphics 2000 Cray 2002 Unlimited Scale
Sherpa invests $500k
2003 Cassatt $30M from Warburg Pincus Bill Coleman becomes CEO (Co-founder
of BEA Systems: BEAS - NASDAQ NM)
MN 8th in High-Tech States
Source: Milken Institute, 2004
MN 8th in High-Tech States
Source: Milken Institute, 2004
Reasons MN is a World-Class Competitor
10. Proven Performance - Ranked ninth in major corporate expansions in 2001 and made the top five list for development capacity and business vitality.
9. High-Tech Industries - One of the top 10 states for creating high-tech jobs.
8. Robust and Diverse Economy - Minnesota's economy grew 43.3 percent in the 1990s, while the nation's economy grew just 34.7 percent.
7. Skilled and Educated Workforce - Nearly 91 percent of Minnesotans have a high school diploma (third in the nation) and 31 percent have earned bachelor's degrees (seventh).
6. Education Breeds Investment Ideas - Ranking fourth in the number of companies spun off from its discoveries, the University of Minnesota not only provides skilled workers, but also contributes to the state's economy.
Source: Department of Trade and Economic Development
Reasons MN is a World-Class Competitor
5. Reliability and Affordability – Affordable utilities, and commercial are competitive with those of other major cities .
4. Transportation Links – MSP International Airport, a portal to the world, offers non-stop flights to 130 U.S. cities, 23 to Canada, Latin America, Europe, and Asia.
3. Technology – Ranked 8th in High-Tech States in the 2004 Milken Institute study.
2. Venture Capital - A 2001 study by the National Venture Capital Association ranked Minnesota 11th in jobs created by companies originally backed by venture capital, and the second fastest-growing state for venture capital investment between 1996 and 2001.
1. Quality of Life - Minnesota's cultural attractions, outdoor recreation and scenic landscape appeal to both residents and visitors. And for many years, Minnesota has topped Morgan Quitno's "Most Livable State" rankings.
Source: Department of Trade and Economic Development
Deal Flow - National vs. Local
When Venture Capital deal flow fell on a national level, Minnesota’s deal flow increased!
-11.2%
+3.6%
-15%
-10%
-5%
0%
5%
% Change in Deal Flow
2003 Deal Flow Compared to 2002
US VC MarketMinnesota VC Market
Source: PWC Money Tree
Venture Impact in Minnesota
In 2002 and 2003, Minnesota Venture Capitalists invested $540 million in 114 deals.
Average investment per deal = $4.7 million.
Source: PWC Money Tree, Minnesota Workforce Center
Liquidity through IPOs
Since 1993, Minnesota Venture Backed Companies have raised $1.5 billion in IPO financing.
The aggregated market capitalization of these companies (count 40) is $8.0 billion.
Capital Raised by Venture Backed MN IPOs
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
1993 1994 1995 1996 1997 1998 1999 2000 2003
$ Raised by IPO $ Average
Average = $176.2 million
Source: Venture Economics/NVCA
FAQs about Venture Capital
Is Minnesota Fly-Over Land?
Workforce Stable, educated and high-tech
Higher Education Research dollars and MBA programs
Large Companies Fortune 500
How do I Attract Venture Capital?
www.sherpapartners.com
How do I Invest in Venture Capital?
www.sherpapartners.com
Sherpa Partners, LLCSherpa Partners, LLC5050 Lincoln Drive - Suite 490
Minneapolis, MN 55436
Rick Brimacombwww.sherpapartners.com
Direct: 952-942-1074Main: 952.942.1070
