Today’s Venture Capital Environment

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Today’s Venture Capital EnvironmentToday’s Venture Capital EnvironmentTed R. WoolschlagerDirector, Emerging Growth MarketsMid-Atlantic AreaErnst & YoungJune 7, 2003

Ted R. WoolschlagerDirector, Emerging Growth MarketsMid-Atlantic AreaErnst & YoungJune 7, 2003

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Tech Investing: The Good News & The Bad NewsTech Investing: The Good News & The Bad News

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Venture Capital Today:Venture Capital Today:

…The bad news:

• Public markets shut tight

• Less money being raised

• Funds being closed… A challenging environment

…The bad news:

• Public markets shut tight

• Less money being raised

• Funds being closed… A challenging environment

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Extremely Difficult Exit EnvironmentExtremely Difficult Exit Environment

• Nasdaq Down 39% 2000; 21% 2001, 33% 2002

• 2002: 19 Venture-Backed IPOs Raising $2.2BN



• M&A Deal Environment Quiet

• Nasdaq Down 39% 2000; 21% 2001, 33% 2002




• M&A Deal Environment Quiet

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The Hangover Effect: The Math Is UglyThe Hangover Effect: The Math Is Ugly

From 1995-2000:From 1995-2000:

14,463

978

1,529

1,180

10,776

Companies funded

Went public

Were acquired

Went out of business

Remaining

Source: Venture Economics; Venture Source

--

-

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…The Good News…The Good News

• Less money chasing deals

• Bigger, more mature companies being financed

• Attractive valuations and terms

• Exit infrastructure larger since last cycle

• Hot markets continue to be PNW, MAA, NE and NY

… High returns possible at market bottoms

• Less money chasing deals

• Bigger, more mature companies being financed

• Attractive valuations and terms

• Exit infrastructure larger since last cycle

• Hot markets continue to be PNW, MAA, NE and NY

… High returns possible at market bottoms

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Funds Raised by Venture Capital Firms Q2:00 to Q2:02Funds Raised by Venture Capital Firms Q2:00 to Q2:02

30.828.9

23.4

17.4

11.7

7.14.6

1.7 1.8

0

5

10

15

20

25

30

35

2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02

30.828.9

23.4

17.4

11.7

7.14.6

1.7 1.8

0

5

10

15

20

25

30

35

2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02

$ mil

Source: PricewaterhouseCoopers / Venture Economics / National Venture Capital Association / Money Tree

• Less competition for new deals

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Am

oun

t In

vest

ed (

$ B)

Nu

mb

er of Deals

*Note: 9/30/02 Figures Annualized

Slower Investing PaceVC Equity Into Venture Backed Companies

Slower Investing PaceVC Equity Into Venture Backed Companies

$18.3

$34.1

$93.2

$49.0

$17.7$12.8$9.9$6.8

1313

1898

2169 2502

4501

6046

2985

1948

$0

$25

$50

$75

$100

1995 1996 1997 1998 1999 2000 2001 2002*

0

1,000

2,000

3,000

4,000

5,000

6,000

Amount Invested ($B) Number of Deals

$18.3

$34.1

$93.2

$49.0

$17.7$12.8$9.9$6.8

1313

1898

2169 2502

4501

6046

2985

1948

$0

$25

$50

$75

$100

1995 1996 1997 1998 1999 2000 2001 2002*

0

1,000

2,000

3,000

4,000

5,000

6,000


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Am

oun

t In

vest

ed (

$B) N

um

ber of D

eals“First Sequence” Financings: Q1 1995 – 2002 YTD“First Sequence” Financings: Q1 1995 – 2002 YTD

$0.8$1.0$0.9$0.8$1.1$1.2

$0.8$1.2$1.1$1.3$1.2

$1.8$1.5

$1.9$1.7$2.1

$3.1

$3.7

$7.2

$8.8$8.7

$6.2

$5.5

$3.0

$1.8$1.3$1.3$1.3$1.2$1.0

$2.1

258210 220 214

244299

254

353 338297 302

375

724

353 345394

367

559

654

879

941 956

803

654

372

313

255227

197 214

159

$0.0$1.0$2.0$3.0$4.0$5.0$6.0$7.0$8.0$9.0

$10.0

Q195

Q395

Q196

Q396

Q197

Q397

Q198

Q398

Q199

Q399

Q100

Q300

Q101

Q301

Q102

Q302

0

100

200

300

400

500

600

700

800

900

1,000


$0.8$1.0$0.9$0.8$1.1$1.2

$0.8$1.2$1.1$1.3$1.2

$1.8$1.5

$1.9$1.7$2.1

$3.1

$3.7

$7.2

$8.8$8.7

$6.2

$5.5

$3.0

$1.8$1.3$1.3$1.3$1.2$1.0

$2.1

258210 220 214

244299

254

353 338297 302

375

724

353 345394

367

559

654

879

941 956

803

654

372

313

255227

197 214

159

$0.0$1.0$2.0$3.0$4.0$5.0$6.0$7.0$8.0$9.0

$10.0

Q195

Q395

Q196

Q396

Q197

Q397

Q198

Q398

Q199

Q399

Q100

Q300

Q101

Q301

Q102

Q302

0

100

200

300

400

500

600

700

800

900

1,000


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Median Valuations of Venture Rounds Q1:00 to Q2:02Median Valuations of Venture Rounds Q1:00 to Q2:02

Median Pre

money Valuation

($ mil)

Source: VentureOne

• Valuations down 61.4% in 8 quarters

“Venture valuations Go Back to Levels of Mid-1990s” -The Wall St. Journal, August 28, 2002

$25.9

$24.0$25.4

$21.8

$17.8$17.0

$13.4

$15.9

$10.0$11.1

$9

$19

$29

1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02

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Attractive ValuationsAttractive Valuations

Median Valuations of Venture-backed Companies Q1:00 vs. Q2:02$ in millions

Round

Seed

First

Second

Later

Q1:00

$5.30

$13.00

$39.00

$100.00

Q2:02

$3.00

$7.00

$12.00

$24.00

Change

-43%

-46%

-69%

-76%

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Venture Capital Has Always Been a Cyclical BusinessVenture Capital Has Always Been a Cyclical BusinessLate 80’s / Early 90’s:• # VC Funds 1985: 850

• # VC Funds 1991: 450

• # IPOs 1986: 377

• # IPOs 1989: 63

• # Co’s Backed 1987: 523

• # Co’s Backed 1991: 237

…AND YET:

• Cisco: 1st VC Funding: 1987IPO: 1990

• AOL: 1st VC Funding: 1986IPO: 1992

• UUNet: 1st VC Funding: 1990IPO: 1995Sale: 1996

Late 80’s / Early 90’s:• # VC Funds 1985: 850

• # VC Funds 1991: 450

• # IPOs 1986: 377

• # IPOs 1989: 63

• # Co’s Backed 1987: 523

• # Co’s Backed 1991: 237

…AND YET:

• Cisco: 1st VC Funding: 1987IPO: 1990

• AOL: 1st VC Funding: 1986IPO: 1992

• UUNet: 1st VC Funding: 1990IPO: 1995Sale: 1996

Mid 70’s:• $ Committed to VC 1974: $ 380

mil

• $ Committed to VC 1977: $ 62 mil

• # IPOs 1972: 75

• # IPOs 1975: 2

…AND YET:

• Apple: 1st VC Funding: 1977IPO: 1980

• MSFT: 1st VC Funding: 1976IPO: 1986

• Symbol: 1st VC Funding: 1975IPO: 1979

Mid 70’s:• $ Committed to VC 1974: $ 380

mil

• $ Committed to VC 1977: $ 62 mil

• # IPOs 1972: 75

• # IPOs 1975: 2

…AND YET:

• Apple: 1st VC Funding: 1977IPO: 1980

• MSFT: 1st VC Funding: 1976IPO: 1986

• Symbol: 1st VC Funding: 1975IPO: 1979

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Huge Growth of Venture-Backed Companies -- Through Every CycleHuge Growth of Venture-Backed Companies -- Through Every Cycle

Significant economic impact:

• 12.5 mil direct jobs

• 27 mil direct and indirect jobs

• $ 1.1 tril in GDP

• 11% of US GDP

• $ 157 bil in R&D investment

• Huge leverage to capital invested

Significant economic impact:

• 12.5 mil direct jobs

• 27 mil direct and indirect jobs

• $ 1.1 tril in GDP

• 11% of US GDP

• $ 157 bil in R&D investment

• Huge leverage to capital invested

Source: DRI-WEFA Study; NVCA

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Venture Has Outperformed Other Asset Classes in the Medium and Long RunVenture Has Outperformed Other Asset Classes in the Medium and Long Run

Returns (%)

Fund Type 1 Yr 3 Yr 5 Yr 10 Yr 20 Yr

All Venture (23.8) 41.1 34.9 25.9 17.3

All Buyouts (9.6) (0.1) 4.9 10.7 14.2

Nasdaq (33.8) (22.2) (5.2) 8.3 10.2

Dow (15.9) (8.0) 1.2 9.7 11.8

S&P (22.2) (12.2) (1.1) 7.8 10.6

Source: NVCA / Venture Economics

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A Success Story- BlackboardA Success Story- Blackboard

• Blackboard Inc.

• Software- eLearning

• Raised over $100 million

• Both VC and strategic investments

• Survived the “bubble”

• Revenue of approx. $70 million, cash flow positive

• Blackboard Inc.

• Software- eLearning

• Raised over $100 million

• Both VC and strategic investments

• Survived the “bubble”

• Revenue of approx. $70 million, cash flow positive

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Focus on BiotechnologyFocus on Biotechnology

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Global Biotech at a glanceGlobal Biotech at a glance

Key metricsKey metrics

Revenue ($m)Revenue ($m)

R&D expense ($m)R&D expense ($m)

Net loss ($m)Net loss ($m)

Number of employeesNumber of employees

$34,874$34,874

$16,427$16,427

$(5,933)$(5,933)

188,703188,703

Number of companiesNumber of companies

Public companiesPublic companies

Private companiesPrivate companies

TotalTotal

622622

3,6623,662

4,2844,284

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Biotechnology is a global industry . . .

Biotechnology is a global industry . . .

85 / 41685 / 416

CanadaCanada

342 / 1,457342 / 1,457

U.S.U.S.

104 / 1,879104 / 1,879

EuropeEurope91 / 53291 / 532

Asia/PacificAsia/Pacific

Distribution of public/total biotechnology companies driving the

emergence of centers of excellence.

Distribution of public/total biotechnology companies driving the

emergence of centers of excellence.

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. . . and is concentrated in the U.S. and Europe. . . and is concentrated in the U.S. and Europe

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Countries we covered

79%

Countries we covered

79%Others21%

Others21%

Global GDPGlobal GDP Share of global biotechnology revenues

(Public companies)

Share of global biotechnology revenues

(Public companies)

U.S.72%U.S.72%

Europe22%

Europe22%

Canada 3%Canada 3%

Asia/Pacific 3%Asia/Pacific 3%

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Major findingsMajor findings

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EuropeEurope

U.S.U.S.

CanadaCanada


Record-LevelVenture Fundings and

Drug Approvals

Rapid Growth2nd Largest Concentration

of Biotech Companies

12th Consecutive Year Of Revenue Increase

Emerging Biotech Player

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Partnering Across BordersPartnering Across Borders

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CanadaCanada

U.S.U.S. EuropeEurope


Mature marketShort term

earnings boost

Pharma seeking new technology

Biotechseeking global development and capital

Source: Ernst and Young Beyond Borders Report 2002

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ConclusionsConclusions

• Technology Is Not Dead, “It’s Just Resting” – Still the Source of Major Productivity Gains

• Absolute Returns Will (of course) Be Lower But Deals Must Be Priced to Outperform

• Longer Exit Horizon Puts Focus on Business Partnership

• Emphasis on Who Can Help Build Companies

• Technology Is Not Dead, “It’s Just Resting” – Still the Source of Major Productivity Gains

• Absolute Returns Will (of course) Be Lower But Deals Must Be Priced to Outperform

• Longer Exit Horizon Puts Focus on Business Partnership

• Emphasis on Who Can Help Build Companies

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Conclusions:Conclusions:

1. Now is a good time to invest -- valuations are low, terms are good (for the buyer)

2. The pace of innovation continues -- growth will return, and historically the most money has been made investing at cyclical bottoms

3. Private equity is institutionalizing – a handful of brands will emerge; standards will be the norm

1. Now is a good time to invest -- valuations are low, terms are good (for the buyer)

2. The pace of innovation continues -- growth will return, and historically the most money has been made investing at cyclical bottoms

3. Private equity is institutionalizing – a handful of brands will emerge; standards will be the norm

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Thank YouThank You

Documents

Today’s Venture Capital Environment