Venture Capital (September 2012)

State of venture capital including angel financing and challenge of fundraising

1. Venture Capital: Angels and VCs James G. Clarke Partner & Senior Portfolio Manager Fiduciary Research & Consulting

2. Venture capital model is evolving Angels increasingly competing with venture capital firms for deal flow The traditional venture capital model is broken Raising money is hard…really, really hard Key Takeaways

3. Really expensive Fat tailed distribution Persistence of returns A lot of “smart” institutions aren’t very smart. Venture Investing in Different

4. A (really!) brief history of venture capital American Research & Development Founded by Georges Doriot, the “father of venture capital” $70,000 invested in 1957 in DEC returned $355m in 1968 IPO J.H. Whitney formed in 1946 by the Whitney Family - One time investment of $5m - Model followed by several other prominent families including Phipps (Bessemer Ventures), Rockefellers (Venrock) and Mellon Families (Mellon Capital) Whitney accepted first outside money in 1999 Bessemer started taking outside money in 2007

5. Venture Capital Fundraising Source: Private Equity Analyst

6. Venture Capital Returns

7. Killing the Golden Goose

8. 8 Source: NVCA , VentureSource Meanwhile , exit markets remain choppy with IPOs rare and the majority of M&A activity taking place at valuations <$50MM Source: PWC/Thomson Venture Economics/NVCA MoneyTree™ Survey VCs overfund companies and back several times as many start-ups as they exit in a typical year Can venture capital still make money?

9. 9 Many VCs today are forced to “swing for the fences” and <$ 100 million exits are considered inadequate A typical $500M fund Seeking 3x, or ~20% IRR Needs to generate $ 1.5B in proceeds Add in fees & carry Now needs to generate $ 1.75B But only own 20% of start-ups (if lucky) Thus, must create ~$9B in company value But creating such considerable levels of enterprise value can be daunting when company mortality rates are high and billion dollar exits remain rare Historically, more than half of companies have returned less than the capital invested in them VCs needs big deals and HUGE returns

10. vs

11. Angels vs. VCs US $20.10 billion ~61,900 deals 31% seed/startup 67% early/expansion stage 265,400 individuals Angel Investors 2010 US $21.97 billion ~2,750 deals 8% seed/startup/ 24% early stage 68% later/expansion capital 462 firms active Venture Capital 2010 Source: Angel Capital Assoc.

12. Powerful Trends Underpin Disruption of the Status Quo and Make VC Profitable, Again! Venture Investment Associates Trends Favoring Lower Capital Needs and Supporting Agile Start-ups Lead to Profitable Exits 13 Lower Start-Up Costs Faster and More Agil e Development Cost reductions in processing power, storage, and bandwidth Innovations in virtual infrastructure (Cloud) Open source software and tools Off-shoring of low value-added work New web dynamics & business models facilitate rapid customer adoption ( viral growth) Ability to scale businesses in response to (not necessarily ahead of) growth Parallel processing of idea testing Quick pivots allow for more flexibility Allow bad ideas to fail faster, requiring less investment in unproductive ideas The amount of capital and time required to get a start-up to first product shipment are a fraction of those needed a decade ago Developments in Technology and Business Processes Have Slashed Start-Up Costs and Sped Up Development Time The d ecimalization of NASDAQ trading killed the small IPO by causing research and market making to be too costly, but The capital efficient start-ups has made small trade-sales profitable with multiple possible exit points Source: Anonymous Small VC Firm

13. Warning – Modest exaggeration. Alan Patricof vs. the World

14. Alan Patricof

15. Raising Money can be Hell 515 Contacts 250 Passed 100 No Response 33 2 nd Meetings 12 DD Requests 9 Investors 154 1 st Meetings

16. Venture capital model is evolving Angels increasingly competing with venture capital firms for deal flow The traditional venture capital model is broken Raising money is hard…really, really hard Key Takeaways

17. The Venture Capital Cycle , Gompers and Lerner, 2006 Venture Capital and Private Equity Casebook , Lerner et al, 2008 The Art of the Start , Guy Kawasaki, 2004 Beyond the J-Curve, Meyer & Mathonet, 2005 Capital Ideas, Against the Gods and Power of Gold all by Peter Bernstein This Time is Different , Carmen and Rogoff, 2009 Where are the Customers’ Yachts?, Fred Schwed, 1985 The Myth of the Rational Market, Justin Fox, 2009 The Millionaire Next Door , Stanley and Danko, 1998 When Genius Failed , Roger Lowenstein, 1998 Ahead of the Curve , Philip Delves Broughton, 2008 Pioneering Portfolio Management , David Swensen, 2000 Liars Poker , Michael Lewis, 1990 What Works on Wall Street , James O'Shaughnessy, 1998 Recommended Reading