The State of the Venture Capital Markets

Mark Suster

VCJ Venture Alpha Conference – October 2011

@msuster

What is the State of the VC Market?

What Comes After Social Networking?

Accenture (software dev)

BuildOnline (’99)

Koral (’05)

VP Product Mgmt, Salesforce.com

Largest VC firm in Southern California

Both Sides of The Table

This Week in VC

The Set Up

What is Driving Change?

It Is Dramatically Cheaper to Start a Company

Open source

Cloud

Developers Start

Companies

2000

$5m

$500k

2005

$50k

2009

$5k201

1

Amazon & Ycombinator Have Fueled the Market

• 90% reduction in cost

• Faster time-to-market

• Great ability to experiment

So Founders Much Younger, More Technical

Huge Explosion in Tech Startup Creation

Seed Deals /

Incubation

While The Total Number of VCs Has Right-Sized

The Opportunities are Much Bigger

2001 2011

100

2,000 • Always On

• Higher Speed

• Payment Ready

• Socially Linked

Millions Online

Conditions Actually Bode Really Well for VCs

Active VCs

Seed Deals

Revenue Potential+

So What Exactly Is Changing in our

Industry?

Some Goods, Some Bads

Mentorship-Led Investing Has Captured Enormous Talent Pool

Access to Deals

Access to Deals

Great New Focused & Disciplined VCs Created

Super Early

Territory

Topic Area(i.e. big data)

Thrive

Early or Classic A

Some Traditional VCs Now Doing Many Seed Deals

SeedSeed C-ERound

C-ERound

A, BRoundA, B

Round

This is Driven by FOMO (Fear of Missing Out)

High volume, small deals

No oversight

Purely an “option”

Not smart strategy for VC or founders

In H1 2011 80% of LP Money Went to Just 7 Firms. The Billion Dollar Club.

7 Firms Total

$6.3

$8.1

VC Money Raised($ billion)

Which Begs the Question of Whether It’s Venture Capital or Growth Equity

SeedSeed C-ERound

C-ERound

A, BRoundA, B

Round

Fund Size + FOMO Driving Separation from Price & Underlying Value

Time

$

Historic Value

Today’s Market

People are Paying Growth Prices for Market Risk

Time

Val

uatio

n

Product RiskProduct Risk

Growth / Scale Risk

Growth / Scale Risk

Monetization / Competition RiskMonetization /

Competition RiskMarket RiskMarket Risk

Probably Less Traditional VCs Being Funded Lately.

SeedSeed C-ERound

C-ERound

A, BRoundA, B

Round

$25-75m

Typical Fund Size

$200-300m

$500m-$1bn

Traditionally VCs Have Focused on Few Companies & Deep Commitments

1-2 deals per partner /

year

Many deals / year

Ops SupportOps Support

Two great firms have reinvented model by focusing on the “group collective”

• Founder friendly

• High volume

• CEO Summits

• Founder Email Lists

• X-Company Equity Sharing

• Heavy focus on “second round capital”

WinningWinning Follow On $$Follow On $$

Some of Best Returns Seem to Be Driven By “Right-Sized” Traditional

VCs

Public

Accessible

Though-Leaders

Public Openness Helps With Every Major Stage of the VC Lifecycle

Access to Deals

Access to Deals WinningWinning Follow

On $$Follow On $$ ExitsExits

Top end of funnel much wider

Founders want to

work with you

VCs work with others they know,

like & respect

Awareness with

buyers for your

portfolio

So What is the Next Big Investment Opportunity

on the Internet?

Television.

Yes, really.

Americans watch 5.3 hours of TV / Day

TVReading

< 1 Hour

5.3 Hours

Media Patterns

Online

3 Hours

You Tell Me What the

Future of the Internet Is?

But VCs Hate Investing in Content – Hits Driven Business?

It’s Not Just Dogs on Skateboards Anymore

A Disruptive Breed of Digital Content Producer Has Emerged

UGC Network TVYouTube TV

Pro

du

cti

on

C

osts

/

Min

ute

$100-400

$6,000-8,000

These 4 LA Companies Alone Doing > 3 Billion Video Views / Month

YouTube TV

Costs

/

Min

ute

YouTube is the New Comcast … And Notice the Change in Branding

With YouTube Content Distribution is Much More Predictable

ViewerViewer

Subscribers

Email Lists

Facebook Connect

YouTubeYouTubeProducerProducer

Youth Demo Already 1/3rd of Time Online Watching Video

Streaming Video

Other Surfing

And Revenue Becoming Substantive

How Mainstream? 86% of All Internet Watch Online Video

Aug 11

42 billion views

185 million viewers

228 videos / person

17 hours

91% of Households Still Pay for TV (91%)

This Market Disruption Will Be

Enormous – And It’s Arriving Now

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Thank you