Vator Venture Shift, July 2013

Venture Outlook

Series A Crunch It’s real, it’s here!

Seed Funding vs. Series A

2009 2010 2011 20120

200400600800

100012001400160018002000

SeedSeries A

Source: Cbinsight as reported by Dan Primack

# D

eals

This is how the data is reported …

Series A Cliff

2009 2010 2011 2012 20130

200400600800

100012001400160018002000

SeedSeries A

It matches until …

Source: Cbinsight as reported by Dan Primack

# D

eals The

Cliff

This is the relevant comparison …

Shift seed forward a year…

The Faceplant Train Wreck!

Web 2.0 EraIPOs

FOMO chills

Series A slows down

Seed triage, bridging

Angels fear to tread

“Faceplant” Accelerators cut back on class

sizes

Q2-2012 Q3-2012 Q4-2012 Q1-2013 Q2-2013

Down Rounds Spiked After Faceplant

Source: Fenwick & West

Faceplant

Reaction (Ouch!)

Traditional VC Flat So Far in 2013

Pitchbook Shows a Decided Downtrend

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q2009 2010 2011 2012 2013

$0

$2

$4

$6

$8

$10

$12

0

200

400

600

800

1,000

1,200

1,400

$5.3 $5.4 $6.0 $5.2 $6.2 $7.4 $6.1 $6.3$10.0$9.0 $9.4 $8.0 $8.0 $9.3 $7.1 $6.9 $7.1 $7.9

741676

726765 812

887821

870

1,0781,0571,054

966

1,1801,203

956897 900

778

Capital Invested ($B) # of Deals Closed

Series A Flat So Far in 2013

Slight Uptick(222 in Q1, 246 in Q2) Seasonally Expected

How Many Seed Deals Will Be Orphaned?

“Getting to Series A” is Fading as the Goal

Seed Follow-On Financing:

Traditional VCA Round

“Bullpen” StyleFollow-On Seed

Vintage 2010, in 2011 45% 12%

Vintage 2011, in 2012 27% 23%

The Crunch

The Alternative

Source: Fenwick & West 2012 VC Survey

VC IndustryMajor ongoing disruption

“The era of the gentleman VC

is over”

VC Returns Sucked for a Decade

VC Industry Consolidated

1993 1995 1998 2000 2003 2005 2008 2010 20130

100

200

300

400

500

600

33 54 77118

79 81 86 83 6826

61

138

282

136 155 175148

122

0

5

20

143

2744

5136

42

$100M+$20-100M$10-20M

Source: Thompson Reuters; Menlo Ventures Analysis

Active Venture Funds(Active = Over $1m in at least 5 deals)

“Lean” Disrupted the Venture Model

Cloud storage, incubators

Open source libraries, commoditized hardware

Oracle license, large salaries, expensive machines

Lean Enabled “Option-Buying” VCs

Old Model: “life cycle” VC New Model: option buying

Smaller fund

Hyper-active pace

Small amounts at early stages

Fail fast – start something better!

Oversized reserves –double down on winners!

And a Much Faster Investment Pace(40 per year vs. traditional venture 4-5)

Option Buying Pace

Smaller Deal Size Pushed Big VC Later

Source: PwC Q3 survey as reported by Fenwick & West

$2.5M 2012

$4.2M 2007

Opening the Door to Funding Alternatives

Accelerators

Super-Angels

Micro-VCs

Crowd-funding

Bullpen

Secondary Markets

> 5000 dealsper year

Micro VCs

Accelerator Super Angels

$250K angel

$1M seed

Bullpen Formed as an Alternative to the Series A

Bullpen saw disruption coming:

Bullpen GPs were active angels & LPs in seed funds like First Round Capital

The need: a seed follow-on round, below the A

The result: bypassing the A with a “shovel-in” round

Bullpen acknowledged as Series A Crunch thought leader

PrognosisNew Wave of IPOs Coming!

“FOMO = Fear Of Missing Out”

Venture Returns Improving

Index returns:

10 yr: 5.3%

3 yrs: 12.7%

Median returns:

10 yr: (4.6%)

Source: Cambridge Associates; NVCA

Venture Liquidity Ratio Improving(Liquidity Ratio = Money Out vs. Money In)

Source: Menlo Ventures

Another Tech Bubble is Brewing

Tech M&A Values Increasing

Year of Tech M&A Number Average Size ($MM)

2011 75 $512

2012 94 $717

Source: Tower Watson Quarterly Deal Performance Monitor

Key Exits in 2012• Kayak

$1.8B• Kenexa $1.3B• Yammer

$1.2B• Meraki

$1.2B

Tech IPOs Increased in Q2

WSJ Headline: The New Wave of IPOs

2013 IPO Candidates

Venture DisruptionThe Revolution is Broad-Based

VC Disruption is Part of the Larger Trend

The Revolution Will Not Be Categorized Disruptive Deals Replace the Incumbents

vs. Facebook vs. Hotels vs. PayPal

What’s Next??

Vertically-oriented incubators New instruments: capped

converts, convertible equity Secondary liquidity Crowd-funding … who knows what’s next …

Its the easiest time ever to start a company … but one of the hardest times ever to scale a winner!