State of the Market 2005 A Slow Return to Normalcy Robert R. Ackerman, Jr.

transcript

State of the Market 2005

A Slow Return to Normalcy

Robert R. Ackerman, Jr.

Managing Director; Allegis Capital

Corporate Venturing & Strategic Partnering Conference

May 17, 2005

U.S. Venture Environment

Investe

f Deals

After 3 Down Years, Investment Rises in ’04

Deal Flow and Equity into Venture-Backed Companies

Source: Dow Jones VentureOne/Ernst &Young

$20.4$18.9$21.8

$17.9$13.1

$9.2$6.4$4.4

206720922340

25472211

13151075

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Amount Invested ($B) Number of Deals

Activity Slows in 4Q’04 Deal Flow and Equity into Venture-Backed Companies

Investe

f Deals

$4.5$4.9$5.6$5.5$5.3

$4.8$4.6$4.3$4.9$4.7

$6.3$5.9

602644

565529

495523

579520

493 479

4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04

Amount Invested ($B) Number of Deals

Deal Flow Maintains Typical Division Deal Flow Allocation by Industry Sector

f Tota

4Q01 2Q02 4Q02 2Q03 4Q03 2Q04 4Q04

Products &Services

Healthcare

4%5%2%

Round Allocation Back to Mid-’90s LevelsDeal Flow Allocation by Round Class (Annual)

f Tota

*Seed and First Rounds Combined

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Restart

Second

Seed*36% *33%

33% 37%

10% 11%

Most Dollars Directed at 2nd & Later Rounds

Investment Allocation by Round Class (Annual)

ollars

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Restart

Second

Seed*44%

Capital Allocation to Later Rounds Continues

Investment Allocation by Round Class

ollars

4Q01 2Q02 4Q02 2Q03 4Q03 2Q04 4Q04

Restart

Second

Median Deal Size Consistent in 2004Median Amount Invested Per Financing Round

Investe

$6.5$7.0$7.0$7.0

$5.8 $6.0$6.5

$6.2$6.0$6.0

4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04

2nd & Later Stage Rounds Larger in 2004Median Amount Invested by Round Class (Annual)

Investe

$9.5$8.2

$3.5$5.0

$3.0$1.0$0.6

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Later Round Second Round First Round Seed Round

West Coast Dominates Venture InvestmentRegional Investment in the United States 4Q’04

Texas5%

Washington State2%

All Other US24%

Research Triangle

New York Metro5%

Potomac7% Southern

California11%

New England13%

Bay Area 32%

Valuations Rise to Pre-Bubble Levels in 2004

Median Premoney Valuation by Year

$10.0$10.8

$12.9$11.1

$9.3$10.0$8.2

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

2nd and Later Stage Valuations Rise in 4Q’04

Median Premoney Valuations by Round Class (All Industries)

$16$15

$3$3$0

4Q011Q022Q023Q024Q021Q032Q033Q034Q031Q042Q043Q044Q04

Later Stage Second Round First Round Seed Round

IPO Activity Slows in 1Q’05Deals and Amount Raised Through IPOs

$1.6 $1.4

$0.4$1.8

$19.2$19.5

$3.7$4.6

222022

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05

Amount Raised ($B) Venture-Backed IPOs

ount Rai

-Backed IPO

Fewest Venture-Backed IPOs in Six Quarters

Deals and Total Amount Raised Through IPOs

$0.4$0.4

1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05

Amount Raised ($B) Venture-Backed IPOs

ount Rai

sed ($B)

re-Backe

1Q’05 IPOs Raised Less Prior to Going Public

Median Amount Raised Prior to IPO

$49.0$47.8$46.9

$13.0$15.0$10.3

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05

nt Rai

IPO ($M

And Went Out at Lower ValuationsMedian Pre-Valuation at IPO

$224$233$229

$105$79

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05

Smaller Offering Sizes Seen in 1Q’05Median Amount Raised at IPO vs. Median Pre-Valuation at IPO

$224$233$229

$105$79

$41$50

$66$80

$60$76

$62$42$32$32

1996 1997 1998 1999 2000 2001 2002 2003 2004 1Q05

Median Pre-Valuation at IPO ($M) Median Amount Raised at IPO ($M)

) Median

ount R

aised ($M

European Venture Enviroment

Perspective on European MarketEquity Investment in Venture-Backed Companies, US vs. Europe ($)

Overall Investment

Investe

4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04$0

European Equity Investment

U.S. Equity Investment

European Investment Up in 4Q’04Equity Investment in European Venture-Backed Companies

Investe

f Deals

€0.9€0.8

€1.1

€0.7€1.0

€0.8€0.9€0.8

€1.2€1.1

€1.3

€1.5

€2.1

220249

297260

336309

392351

4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04

Amount Invested (€B) Number of Deals

Biopharm & Software Lead 4Q’04 Investing

Equity Investment in European Venture-Backed Companies by Industry, 4Q ‘04

Communications15%

Electronics3%

Information Services3%

Semiconductors2%

Medical IS1%

Software21%

Retail0.1%

Services5%

Products2%

Medical Devices3%

Biopharmaceuticals33%

Healthcare Services3%

Info. Tech.40%

Prod. & Serv.8%

Healthcare52%

Early Stage & 2nd Rounds Pick Up in 4Q’04European Deal Flow Allocation by Round Class

f Tota

4Q01 1Q022Q02 3Q02 4Q02 1Q03 2Q033Q03 4Q03 1Q04 2Q043Q04 4Q04

Second

Seed*42%

40%46%

UK & France Represent 50% of Deal FlowTotal Deals in Europe by Country, 4Q’04

Other14%

Switzerland3%

Denmark9%

Ireland5%

Germany9%

Sweden10%

France24%

United Kingdom 26%

UK Leads 4Q’04 European InvestmentInvestment in Europe by Country, 4Q’04

Other12%

Ireland2%

Switzerland1%

Denmark7%

Germany9%

Sweden11%

France24%

United Kingdom 34%

Investment in France & UK Picks Up in 4Q’04

Equity Investment by Country

Investe

€285

€502

€206€206

€511

€210

€117

€ 200

€ 400

€ 600

4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04

U.K. France Germany Sweden Ireland

So, What’s it all Mean…

Summary

Capital In-Flows Up Significantly$17.5B In New Commitments in 2004 (98’ Levels)

$10.8B in 2003 -- $3.7B in 2002

Capital Out-Flows Grow and Moderate$20.9B in New Investments ($18.1B in 2003)

110% of 03’ -- 97% of 02’ -- 51% of 01’ -- 20% of 00’

At 97’ to 98’ Levels

Approx $40B Still in the Funnel

Corporate VC Stabilized (but concentrated)$1.4B ($1.2B in 03’)

97-98 Levels

Select new Entrants to the Market

Summary - continued

Path to Liquidity is encouraging “Start-Ups”

Growing Confidence

2004’ –27% Series A Financings (21% of Capital)

2003’ – 20.7% Series A Financings (8.4% of Capital)

2002’ – 15% Series A Financings

Indications that trend line is positive – 24% Year over Year Increase in Deals

Historically In the Range of 30-35%

“Seed Corn” for Follow-On Financings

Capital Flowing to the Early and Expansion RoundsFollow-On Financings to the Series A of 2001/2002

72% of Investments in 2004 (79% of Capital)

Valuations are ticking up significantly for later rounds of Investmtn

Looking Forward…

What to Expect

Venture Capital Industry “Reorganization” continues

Restructuring Leading to New Firms

Venture Industry Consolidates (25% Fewer Firms) (30-50%)

Capital Inflows continue to GrowInstitutional Investors are Back (with too much money)2005 - $22B in New Commitments?Over Capitalization??

Funds Return to Basics (VC is not EASY)It’s not like a “Mutual Fund”$250M will be a “good sized” fund for early-stage VC ($400M the upper limit?)Focus on “experience” in VC Professionals“Hands-On” attitude/expectation for InvestorsCollaboration becomes a required skill

Excess Capital will push firms to Early-Stage InvestingMoney is made on the “initial investment” – Cost is an Essential Consideration.Concern: Are the Skills There? Valuation – Driven

What to Expect - continued

M & A Activity Continues to “Heat-Up”

Renewed Confidence on the part of “Buyers” – Cash Surplus

$22.6M Avg in 04’ -- $12.9M in 03’

Consolidation in to Sales Channels

Public Market Stabilizes – IPO’s Return (with Deliberation)

04’ – 93 VC-backed IPOs raising $11B

03’ – 29 VC-backed IPOs raising $2B

The Bar is not coming down…anytime soon.

PatienceTime to M & A Exit – 4.7 Years

Time to IPO Exit - 5.7 Years ($73.2M)

In Closing…

Re-Building on a New Foundation…

2004 – The Fundamentals “Restored”

Capital Flows into VC Fund approaching $20B

VC Investments stabilize around $20B

IPO Window and Increased M & A activity renews cycle of positive returns

The Venture Community

Consolidation continues – still adopting to the new “Reality”

Venture Firms still at the low-end of the historical “experience curve”

Syndication – rediscovery of the lost art

Corporate Venture InvestorsInstitutionalization

The next cycle “starts” – Globalization pushing Accelerated Innovation

But, Caution is Indicated…

The Path to Liquidity is Limited

Caps the Potential for Returns

While Capital In-Flows Continue to Grow

Over-Capitalization in the Pipeline

Returns (next generation funds) Under Pressure?

Push to Earlier-Stage Investing

VC Experience – A Potential Blind Spot

Bubbles are Building

China – The Real Deal but a Very Rocky Road (ala Internet)

“Group Think” continues to plague the Industry

Thank You!

State of the Market 2005 A Slow Return to Normalcy Robert R. Ackerman, Jr.

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