Zell-Lurie Institute for Entrepreneurial Studies

October 27, 20031

EVC Club:

State of the VC Industry

10/29/03

Zell-Lurie Institute for Entrepreneurial Studies

October 27, 20032

Am

ou

nt

Investe

d

($B

)

Nu

mb

er o

f Deals

Source: VentureOne/Ernst & Young

$7.5

$20.3

$35.4

$93.9

$49.2

$17.8$13.1$9.9

19012198

2520

4502

6165

3112

2156

866

$0

$25

$50

$75

$100

1996 1997 1998 1999 2000 2001 2002 1H03

0

1,000

2,000

3,000

4,000

5,000

6,000

Amount Invested ($B) Number of Deals

Underlying data available in VentureSource

2003 Investment Continues to Fall Deal Flow and Equity into Venture-Backed Companies (annual)

Zell-Lurie Institute for Entrepreneurial Studies

October 27, 20033

Deal Flow Continues To StabilizeDeal Flow by Round Class

0%

20%

40%

60%

80%

100%

2Q003Q004Q001Q012Q013Q014Q011Q022Q023Q024Q021Q032Q03

Later Round

Second Round

First Round

Seed Round

% o

f D

eals

Source: VentureOne/Ernst & Young

Underlying data available in VentureSource

Zell-Lurie Institute for Entrepreneurial Studies

October 27, 20034

80% of Dollars Directed at 2nd & Later Rounds

Investment by Round Class

0%

20%

40%

60%

80%

100%

1996 1997 1998 1999 2000 2001 2002 1H03

Later Round

Second Round

First Round

Seed Round

% o

f A

mou

nt

Investe

d

Source: VentureOne/Ernst & Young

Underlying data available in VentureSource

Zell-Lurie Institute for Entrepreneurial Studies

October 27, 20035

Restarts Gain in Popularity

Investment by Round Class

0%

20%

40%

60%

80%

100%

1997 1998 1999 2000 2001 2002 1H03

Restart Rounds

Later Round

Second Round

First Round

Seed Round

% o

f A

mou

nt

Investe

d

Source: VentureOne/Ernst & Young

Underlying data available in VentureSource

Zell-Lurie Institute for Entrepreneurial Studies

October 27, 20036

Deal Sizes Regress to Overall Median Median Amount Invested by Round Class

$6.7

$6.2

$4.3

$0.8$0

$5

$10

$15

$20

$25

2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03

Later Round Second Round First Round Seed Round

Med

ian

Am

ou

nt

Investe

d

($M

)

Source: VentureOne/Ernst & Young

Underlying data available in VentureSource

Zell-Lurie Institute for Entrepreneurial Studies

October 27, 20037

Healthcare Rebounds to 2Q’02 Level

Equity Investment by Industry Sector

0%

20%

40%

60%

80%

100%

2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03

Products &Services

InformationTechnology

Healthcare

% o

f In

vestm

en

t

Source: VentureOne/Ernst & Young

Underlying data available in VentureSource

Zell-Lurie Institute for Entrepreneurial Studies

October 27, 20038

Within Healthcare, Allocations Are Consistent

Healthcare Investment by Sector

0%

20%

40%

60%

80%

100%

1996 1997 1998 1999 2000 2001 2002 1H03

Medical IS

Medical Devices

Healthcare Services

Biopharmaceuticals

% o

f In

vestm

en

t

Source: VentureOne/Ernst & Young

Underlying data available in VentureSource

Zell-Lurie Institute for Entrepreneurial Studies

October 27, 20039

Software & Communications Are the Bulk of IT

IT Investment by Sector

0%

20%

40%

60%

80%

100%

2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03

Software

Semiconductors

InformationServices

Electronics

Communications

% o

f In

vestm

en

t

Source: VentureOne/Ernst & YoungUnderlying data available in VentureSource

Zell-Lurie Institute for Entrepreneurial Studies

October 27, 200310

U.S. Investment: Internet

Zell-Lurie Institute for Entrepreneurial Studies

October 27, 200311

Internet as % of Overall Investment Percentage of Equity Investment in Internet

79%75%

69%66%

58%64%

56% 56% 57%54%

44%

85%81%

85%

25%

50%

75%

100%

1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03

% o

f In

vestm

en

t

Source: VentureOne/Ernst & Young

Underlying data available in VentureSource

Zell-Lurie Institute for Entrepreneurial Studies

October 27, 200312

Most Rounds Include Multiple Investors

Number of Investors Per Round

0%

20%

40%

60%

80%

100%

1995 1996 1997 1998 1999 2000 2001 2002 1H03

5+ Investors

4 Investors

3 Investors

2 Investors

1 Investor

Source: VentureOne/Ernst & YoungUnderlying data available in VentureSource

Zell-Lurie Institute for Entrepreneurial Studies

October 27, 200313

Valuations: By Development Stage

Median Pre-Money Valuation by Development Stage

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

Mill

ion

US

Dol

lars Startup

Product Development

Shipping Product

Profitable

Restart

1997 1998 1999 2000 2001 2002 1Q03 2Q03

Zell-Lurie Institute for Entrepreneurial Studies

October 27, 200314

Valuations: By Investment Round

Median Pre-Money Valuation by Investment Round

$0.0

$20.0

$40.0

$60.0

$80.0

$100.0

Mill

ion

US

Dol

lars Seed Round

First Round

Second Round

Later Round

Restart

1997 1998 1999 2000 2001 2002 1Q03 2Q03

Zell-Lurie Institute for Entrepreneurial Studies

October 27, 200315

Valuation By Round: Early Stages

Median Pre-Money Valuation by Investment Round

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.0

$40.0

Mill

ion

US

Dol

lars

Seed Round

First Round

Second Round

1997 1998 1999 2000 2001 2002 1Q03 2Q03

Zell-Lurie Institute for Entrepreneurial Studies

October 27, 200316

Conclusions

•Approaching post-bubble “equilibrium.”

•Still lots of angst among interests.

•“Smart” money – that which includes

“business building” skills in addition to

cash, is more important than ever.

•Not all good businesses need venture

money.