The State of Venture

Capital

March 2, 2002

John GabbertSr. Director, Worldwide Research

VentureOne Corporation

Three Key Elements for

a Robust Venture

Industry Fundraising

Investment

Liquidity

Fundraising

$48.2

$90.1

$50.5

$29.8

$17.0$12.2

$7.6$6.8$6.2$2.9

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Venture Capital Fundraising Healthy in 2001

Commitments to Venture Capital Funds

Fu

nd

s R

ais

ed

($

B)

Source: VentureOne

$9.0$9.5

$11.7

$17.9

$25.6

$22.7

$25.2

$16.5

$22.7

$11.5

$8.7$7.6

$6.8

$0

$5

$10

$15

$20

$25

4Q98 1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01

But Momentum is SlowingCommitments to Venture Capital Funds

Fu

nd

s R

ais

ed

($

B)

Source: VentureOne

1995 1996 1997 1998 1999 2000 2001

$7.6 $12.2$17.0

$29.8

$50.5

$90.1

$48.2

$6.8 $9.8 $12.8$17.6

$47.2

$91.6

$32.1

$0

$20

$40

$60

$80

$100

Investment Fundraising

Fundraising Far Outpaces Investment in 2001

Fundraising vs. Amount Invested

Am

ou

nt

Investe

d

($B

)

Source: VentureOne

Fundraising Summary

Commitments to venture capital were flat in 4Q01; however,

2001 fundraising was still well above the norm.

Fundraising is becoming more difficult, especially for

newer or unproven funds.

Over half of VC dollars are now in funds greater than $500 M.

Greatest amount of VC money in history available to invest in

entrepreneurship.

Investment: Overall

$6.8 $9.8 $12.8 $17.6

$47.2

$91.6

$32.1

2780

5779

4400

245921491888

1313

$0

$25

$50

$75

$100

1995 1996 1997 1998 1999 2000 2001

0

1,000

2,000

3,000

4,000

5,000

6,000

Amount Invested ($B) Number of Deals

2001: A Sharp Contrast to 2000’s Boom

Equity into Venture-Backed Companies

Am

ou

nt

Investe

d

($B

)N

um

ber o

f Deals

Source: VentureOne

$4.8$6.0

$10.3$11.4

$19.5

$27.0$24.2

$6.3$6.6

$22.3

$18.0

$10.6$8.6

610629736805

1155

1322

15911711

1451

11241070

755665

$0

$5

$10

$15

$20

$25

$30

$35

4Q98 1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01

0

300

600

900

1,200

1,500

1,800

Amount Invested ($B) Number of Deals

Investment Levels Off at Year’s End Equity into Venture-Backed Companies

Am

ou

nt

Investe

d

($B

)

Nu

mb

er o

f Deals

Source: VentureOne

$4.6$5.0

$5.5 $5.8

$7.5

$10.0

$9.0

$10.0 $10.0

$8.0 $8.0

$6.5$7.0

$0

$2

$4

$6

$8

$10

4Q98 1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01

Median Round Size Gets a Boost in 4Q’01

Median Amount Invested Per Round

Med

ian

Am

ou

nt

Investe

d

($M

)

Source: VentureOne

Positively Affecting Later-Stage Rounds

Median Amount Invested by Round Class

$22

$11

$6$6

$15

$7$8

$4$5

$1.6$1 $0.5

$0

$5

$10

$15

$20

$25

4Q98 2Q99 4Q99 2Q00 4Q00 2Q01 4Q01

Later Round

Second Round

First Round

Seed Round

Med

ian

Am

ou

nt

Investe

d

($M

)

Source: VentureOne

Investment Shifts to Second & Later Rounds

Deal Flow by Round Class

0%

20%

40%

60%

80%

100%

1995 1996 1997 1998 1999 2000 2001

Later Round

Second Round

First Round

Seed Round

% o

f D

eals

Source: VentureOne

IT Dominates, Healthcare Recaptures

Investor InterestEquity Investment by Industry Sector

0%

20%

40%

60%

80%

100%

4Q98 1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01

Healthcare

Products &Services

InformationTechnology

% o

f In

vestm

en

t

Source: VentureOne

$11.9

$13.9

$15.0$15.0

$11.0

$6.0$6.0

$3.6$2.9

$7.2$5.6

$4.4 $3.9

584

767

578

903

757

883

421370

663

480404 383

352

$0

$4

$8

$12

$16

$20

4Q98 1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01

0

200

400

600

800

1,000

Total Invested ($B) Total # of Deals

IT Investment Still Falling Equity Investment in Information Technology Companies

Am

ou

nt

Investe

d

($B

)N

um

ber o

f Deals

Source: VentureOne

Communications, Software Are Cornerstones of IT

IT Investment by Sector

0%

20%

40%

60%

80%

100%

1995 1996 1997 1998 1999 2000 2001

Software

Semiconductors

Information Services

Electronics

Communications% o

f In

tern

et

Investm

en

t

Source: VentureOne

Investment: Valuations

$11.1$9.5

$10.7$8.5$8.1

$13.0

$15.6

$21.0

$25.0

$16.7

$0

$5

$10

$15

$20

$25

$30

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

2001 Valuations Fall Below 1999 Levels

Median Premoney Valuation by Year

Med

ian

Pre

mon

ey V

alu

ati

on

($

M)

Source: VentureOne

$17 $18

$22 $22 $22

$27

$24

$27

$22

$18 $18

$14$17

$0

$5

$10

$15

$20

$25

$30

4Q98 1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01

Valuations Recover Somewhat in 4Q’01

Median Premoney Valuation

Med

ian

Pre

mon

ey V

alu

ati

on

($

M)

Source: VentureOne

Later-Round Valuations Boost Overall Numbers

Median Premoney Valuations by Round Class

$101

$43

$35$45

$16$18

$6$7

$14

$6$3 $3$0

$20

$40

$60

$80

$100

4Q98 1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01

Later Rounds

Second Round

First Round

Seed

Med

ian

Pre

mon

ey V

alu

ati

on

($

M)

Source: VentureOne

Healthcare Valuations Up Significantly

Median Premoney Valuations by Industry

$30

$23

$15

$23

$13

$31

$16$14

$27

$0

$10

$20

$30

4Q98 2Q99 4Q99 2Q00 4Q00 2Q01 4Q01

InformationTechnology

Healthcare

Products &Services

Med

ian

Pre

mon

ey V

alu

ati

on

($

M)

Source: VentureOne

Investment: Regions

Texas Edges Out Boston for #3 Spot2001 Regional Investment in the US

Bay Area 32%

All Other US27%

Southern California8%

Texas8%Boston

7%

Potomac5%

New York City4%

Midwest5%

Research Triangle1%

Washington State3%

Source: VentureOne

Bay Area Investment StabilizesInvestment in Bay Area Venture-Backed Companies

$4.4

$7.6

$9.2

$8.1$8.5

$6.3

$3.3$2.8

$2.1 $2.2$2.3

$3.7

$1.5

$0

$2

$4

$6

$8

$10

4Q98 1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01

Am

ou

nt

Investe

d

($B

)

Source: VentureOne

Equity Financing Summary

Equity financing into venture-backed companies leveled off in 4Q’01.

Overall equity investment in 2001 was still the third highest amount on record.

Valuations and median round sizes recovered slightly at year’s end.

Early-stage venture financing has fallen more rapidly than later-stage.

The time between financing rounds is expanding.

Liquidity

$2.7$4.5$5.3$7.2$11.6

$20.3$23.7

$45.5

$15.7

$8.7$13.2

$5.4$4.2

69

81

939898

115108

122

8479

86

53

70

$0

$10

$20

$30

$40

$50

4Q98 1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01

0

25

50

75

100

Amount Paid ($B) Number of Transactions

M&As Continue to SlipTransactions and Amount Paid in M&As

Am

ou

nt

Paid

($

B)

Source: VentureOne

Nu

mb

er o

f Tra

nsactio

ns

$0.8$0.2$0.3$0.5

$1.5

$6.7

$3.5

$7.4$7.4$5.3$5.3

$1.5$0.4

58

44

18

71

42

69

777575

21

7

$0

$2

$4

$6

$8

4Q98 1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01

0

20

40

60

Amount Raised ($B) Venture-Backed IPOs

IPO Liquidity Up Marginally in 4Q01 … Deals and Amount Raised Through IPOs

Am

ou

nt

Rais

ed

($

B)V

en

ture

-Backed

IP

Os

Source: VentureOne

Liquidity Summary

The IPO and M&A markets for venture-backed companies continued their dramatic declines from the record levels of 1999 and early 2000.

IPO volume in 2001 was at its lowest in years.

The amount paid in M&A transactions declined throughout 2001, falling to the lowest level since 1995.

IPO companies in 2001 were more mature, but the time from initial funding to M&A is still falling.

Conclusions & Implications The bad news:

- Liquidity is extremely difficult- VCs are investing much more slowly and cautiously- Valuations are down across the board- Many VC-funded companies will fail to raise more $

The good news:- Liquidity windows open and close- VCs do have money to invest- Expectations are much more realistic- Those companies that succeed in raising $ will have more

board involvement, better resources, lower costs and less competition

- Truly great companies will emerge from this period

More Information

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