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InsideWeb 2.0: The Internet subset formerly known as the Web

Successfully shaping the future: MoneyTree™ FutureCentricSM companies 2005

Q4 and Full-year

Special topics

01Web 2.0:

The Internet subset formerly known as the Web

07MoneyTreeTM Report

Full-year and Q4 results

23Successfully shaping the future:

MoneyTreeTM FutureCentricSM companies 2005

Quarterly features

20Regulatory buzz:

Issues regarding cheap stock and IPOs for private companies

24Industry currents:

Fast-growth CEOs take brighter outlook, but proceed with caution

26Voice of the VC

*nex

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Message to the reader

A new year, a new beginning. So once again nextwave™ is looking to the future—at the evolution of technology and the companies and entrepreneurs driving that change.

Our lead article, “Web 2.0: The Internet subset formerly known as the Web,” explores the next wave of Web-related development driven by the rapid consumer adoption of broadband and high-speed wireless connectivity. Our second article, “Successfully shaping the future: MoneyTree™ FutureCentricSM companies 2005,” showcases a few of the entrepreneurial companies who are building ideas and products that are shaping our future.

Also included in this issue are the fourth-quarter and full-year results of the PricewaterhouseCoopers/National Venture Capital Association MoneyTreeTM Report; data provided by Thomson Financial. Venture capitalists matched 2004 by investing $21.7 billion in 2,939 deals in 2005. See pages 7 through 18 for full details.

Finally, look for our regular features throughout the issue—Industry currents, Regulatory buzz, and Voice of the VC—providing brief updates, useful advice, and expert opinions on both the VC and technology industries.

You have a vision. PricewaterhouseCoopers helps bring that vision to reality. We hope you enjoy the Q4 2005 issue of nextwave™ and appreciate your comments about our current issue or ideas for what you’d like to see covered in future issues. Remember to visit us on the Web at www.pwcnextwave.com.

Tracy T. LefteroffGlobal Managing PartnerPrivate Equity and Venture [email protected]

www.pwcnextwave.com 1

There are many reasons to change a name—from technology updates and business model breakthroughs to participation in the Federal Witness Protection Program. In the case of the Web, the tweak to Web 2.0—first suggested by O’Reilly Media Inc. VP Dale Dougherty—is meant to suggest that enough factors have changed since the late ‘90s to warrant another look at what the Web means to commerce, applications/services, and online communities. Has the process of how we gain access to the Web, interact with it, and deliver services evolved enough to support more profitable, sustainable businesses?

“We are clearly in a new wave of Web-related development that is being driven by the rapid consumer adoption of broadband and high-speed wireless connectivity,” observes Brad Feld, a managing director at Mobius Venture Capital. “Google did a brilliant job of teaching a huge number of people that an acceptable user interface to the Web was simply a box on the screen that you typed text into and hit the search button; this resulted in a resurgence of online advertising and ecommerce that is helping the premises of many pre-bubble entrepreneurs and investors finally become realized. As optimism returns to technology entrepreneurs and investors, we’ve seen an incredible new wave of innovation across all

media types—including text, audio, and video—as well as broad Web adoption by both consumers and enterprises.”

“For us as auditors, Web 2.0 could present lots of exciting opportunities and, hopefully, I think some of these companies may have a better chance of going public than companies in other technology sectors,” notes Danny Wallace, partner in charge of PricewaterhouseCoopers’ Assurance Venture-backed Start-up Practice in San Jose. “However, on the whole, the VCs we speak with—regardless of sector—expect far fewer companies to go public. Let’s say their expectation four or five years ago was that three or four out of ten companies in their

Web 2.0: The Internet subset formerly known as the Web

2 Issue 4: 2005

portfolios might be going public, now it might be one. And, they factor that into their investment strategies.”

Such IPO estimates don’t seem to dampen the spirit of developers, some of whom look to be acquired by Internet companies such as Google and Yahoo!. Benchmark Capital General Partner Bill Gurley says that this seems to be the case with interesting technology/features and tool-based companies with exits under $150 million. “If you’re not sure that what you’re building has the essence of a full, standalone business, there is a huge incentive to bootstrap or take very little money,” says Gurley. “Then, you own 60-70 percent of something, sell it for $20 million, and that’s real cash.”

Principal for New Business Development at Google, Chris Sacca, encourages entrepreneurs to think big: “Don’t assume we have thought about ‘X’ already. One of the most entertaining things for me to do is read the blogs and see how much credit folks give us for our alleged next moves in a particular area,” wrote Sacca in his blog. “They presume we have a big honking master plan document somewhere and have the next few years set forth step-by-step. Truth is, we are constantly learning. We tend to launch early and launch often. However, this doesn’t mean we have it all figured out. You have a killer idea for us? Are we missing the big picture? Can you help us? Fire away. For instance, you guys who have been thinking about VoIP for years and years, what would you do if you were Google, and how can you work with us to get that done?”

Some “serial entrepreneurs” take both routes. For example, Evan Williams sold Blogger to Google in 2003 and in

December 2004 co-founded Odeo— a creative way to record and share audio at no cost to the user—with his neighbor, Noah Glass. This time, the team chose to take VC and other funding, which they describe with a flair in the OdeoBlog as follows: “Leading the deal was Charles River Ventures, featuring George Zachary. In addition to Charles River’s involvement, we included another small firm, Amicus Ventures, and a substantial group of individuals (both in number and weight) in the funding round: Mitch Kapor, Joe Kraus, Tim O’Reilly, Ron Conway, Josh Kopelman, Don Hutchinson, Dave Pell, Mike Maples, Francesco Caio, Barbara Poggiali, Emanuele Angelidis, James Hong, and Ed Zschau.”

Web 2.0 as environment

Hallmarks of the participatory, connected Web 2.0 environment include: the rapid rise of blogging—posting to or writing in Web logs—since 2004 when people discovered that blog software wrote the HTML software for them; categorizing sites, à la del.icio.us and Flickr, collaboratively using keywords referred to as “tags”; the mainstreaming of RSS (Really Simple Syndication), which started as a way to aggregate news feeds, spread to use in job postings, commerce, and enterprise applications and will be part of Microsoft’s upcoming new releases; and more engaging client functionality through the browser using AJAX, which uses existing technology like JavaScript and XML.

“Web 2.0 is really a user application-driven revolution,” notes 27-year-old MBA Charles Hudson, a product manager at Iron Port Systems, San Bruno, California, who marvels at the difference in the way he and his multi-

tasking 19-year-old cousin interact with the Web. “You can assemble subcomponents to make applications much more quickly than you used to be able to do and that’s why you see things like Google releasing a map API and soon you have people mapping friends, mapping packages, mapping restaurants, mapping stores… It’s relatively quick to snap together different data sources to create composite applications on the Web.”

Scott Rafer, who grew up in a tech products household near Boston, is aiming at the under-25 crowd of cell phone users as the new CEO of Wireless Ink. “There are all sorts of things we take for granted on the Web in terms of just being able to find people with the same interests we have,” says Rafer. “And, because of the way mobile phone carriers have behaved there is no central index for people in my area, or ways to find fans of the same bands and similar information. We’re simply going to string a bunch of existing mobile chat system users together with a rational interface so that anywhere on the planet you can find people in your city currently on their phones chatting in this moment about a topic, or in a particular forum, or at this concert.”

David Sifry, founder and CEO of Technorati, a search engine unique for its focus on people and time—instead of pages—considers one of the key changes of Web 2.0 over Web 1.0 to be evidenced by the change in the metaphor for how we think about the Web, from a library, where a reference librarian can help you find the sources you need, to an ongoing conversation. “Google understood an additional dimension of the data,” explains Sifrey. “They understood it was not just about


“ You cannot go into the same water twice.” Plato

understanding key words to figure out relevance, but [they could produce better search results by] counting hyperlinks to those pages. Google is so good because it doesn’t rely on algorithms alone to feature what’s relevant; it uses people to understand context and gray areas as well.”

Sifry’s story seems to be another characteristic of Web 2.0: creating a product because it satisfies a personal need for interacting with the Web. Sifry, an avid blogger who had headed up three previous start-ups, wanted to know who was talking about him and built Technorati over Thanksgiving in 2002. He didn’t intend it as a business, but he explains: “It turns out there are a whole lot of other people out there who basically felt the same way. It just turned out to be wildly popular.” Consider the impact when on-air news organizations can view the buzz about the story they’re broadcasting,

or another event, instantly. “Instead of a 24-hour news cycle, the world is measured in megahertz,” says Sifry.

Technorati is so good because you can search for a topic or name and find out what’s been said about it in as little as a few seconds ago, by whom, and how many other people link to this site—which can offer a sense of authority for the source. The company’s model is to generate revenue in three ways: 1. advertising, 2. fees for sponsored links, and 3. syndication relationships, such as those with The Washington Post, Newsweek, International Herald Tribune, and other big media.

Dean Petracca, Global Managing Partner of Software and Internet Industry Services at PricewaterhouseCoopers, views the difference between Web 1.0 and Web 2.0 as a before-and-after period in terms of technology, its adoption, and

4 Issue 4: 2005

how the two affect business practices, particularly when it comes to greater cooperation among companies.

“I see increased recognition that not only does Web 2.0 encompass technology, content, and connectivity, but also that companies specialize in delivering value in each of those areas, and in many cases, acknowledgement that no one company necessarily has all the talent it needs,” says Petracca. “For example, valuable content that could be delivered over the Web more often might be provided by one company and managed or maintained by another.”

For example, Chicago-based privately held Feedburner enables commercial publishers, podcasters (downloadable audio file makers inspired by the iPod), and bloggers to reach millions of subscribers in more than 190 countries using Rich Site Summary (RSS) technology.

“When we started FeedBurner in 2003, we saw the Web evolving from a tool for simple browsing to more intention-based searching to now allowing consumers to subscribe to any content and read, listen to, or watch it wherever they want, when they are ready to do so,” says Chicago-based FeedBurner CEO, Dick Costolo. “It was clear to us that every network-aware device would soon provide a mechanism to consume all manner of content and that the standard of distribution would be RSS. We had a simple plan to be the people who help publishers navigate the complexities of measuring subscriber reach, maximizing subscription growth, and making money from content in syndication, and that has remained our goal.” On January 24, Feedburner announced its new FeedFoundry

product, which provides mass feed importing, management, and analysis to help publishers with multiple feeds better understand and engage its audience. USA Today.com uses FeedFoundry to manage and measure RSS subscription growth for over 100 of its magazine and columnist feeds.

In any environment, healthy collaborative relationships hinge on a mutually beneficial business model. For example, Revver is a monetization engine for video shorts being backed by Skype’s main investors—Draper, Bessemer, and DFJ. “Revver’s mission in life is to help the publishers or owners or creators of video shorts make money through advertising,” says Andreas Stavropoulous, managing director, Draper Fisher Jurvetson. “So, they publish their video on Revver, set a tag with it, and no matter where it appears as long as someone clicks on an ad delivered somewhere when it plays you get a big piece [of the revenue]. Figuring out the business model—which is making money based either on advertising, subscriptions, or transactions—in the Web 2.0 distributed or syndicated world is no small task,” he adds. “It’s much harder to do when you’re talking about a world of syndication, where your content at point A gets consumed at point B, which may or may not be connected, may be intermittently connected, and measured differently.”

“There are many companies that are taking a longer term view and trying to build a sustainable standalone business,” observes PricewaterhouseCoopers’ Wallace. “It’s hard to do that on your own and often it results in partnering up with another company, particularly a local company if you are considering

“ Web 2.0 is really a user application-driven revolution.” Charles Hudson, Iron Port Systems


venturing into emerging international markets. This is true for large and small companies alike. Consider Yahoo! for example and their recent deal with Alibaba in China, reportedly valued at $4 billion. At the other end of the spectrum you have a company like Mforma, a venture-backed company that provides mobile entertainment content to leading wireless operators globally. They invested in and partnered with two content development companies in China to capitalize on that market’s huge potential. Something they could simply not have accomplished alone. In China, there are 100 million Internet users and 360 million mobile users, giving them the highest mobile phone to Internet user ratio and twice as many phone users as in the US.”

Remember the consumer market?

Not everyone will tell you how they really feel about Internet investing quite the way Gurley can: “Stocks are doing well, there have been some Internet IPOs and M&A exits and companies are making profits—nice profits,” Gurley intones. Here’s the other shoe. The ‘I told you so’:

“I think the venture industry broadly ran away from consumer Internet when the bubble burst, because when the bubble burst consumer Internet went first—it ended up being that telecom equipment was three times the whole consumer Internet—but consumer Internet always had a taint to it. Dot-com became a euphemism for bad business. And so many VCs ran away—I think there were four or five of us that kept after consumer Internet. They were going back to our core, which was what they call

hard technology. That has changed. Now, every VC firm on Sand Hill Road is rushing to hire someone to run their Internet consumer practice. Because if you look over the past five years, whether it’s Google or Skype or Shopping.com, all these deals are Internet deals. They had much bigger exits than other deals. I think the top five exits of the past seven years are all consumer Internet: Google, eBay, Yahoo!, Expedia, Amazon. Now they’re all back. What does that mean? From a supply/demand perspective it’s horrible for investors. You went from having four or five guys to a multiple order of magnitude—now all of a sudden there have been five comparison shopping deals funded after the first three have all been sold—which is a bizarre thing.

“So, I find it more of a time to be cautious rather than opportunistic,” concludes Gurley. “Not because of the opportunity side, which is improving, but it’s not improving at the rate at which the supply side of venture capital has grown.”

Beyond the browser

Online platforms are very Web 2.0 and at the heart of supporting the application service provider (ASP) business model. Consider bubble-survivor Salesforce.com, which was designed from scratch to run over the Internet. Back in 2000 nextwave spoke with Salesforce.com’s co-founder, chairman, and CEO, Marc Benioff, and included his announcement that his pure-play sales-force automation software company planned “to offer a complete customer relationship management environment, including sales-force automation, customer support, and marketing services.”

By September 2005, Salesforce.com had invested $50 million to rebuild its architecture, hardware, and two data centers—and created an on-demand operating system and platform called AppExchange from which Salesforce.com subscribers could choose to test-drive and use business applications from independent vendors, including Adobe PDF, Business Objects’ Crystal Reports, and Skype for free Voice Over Internet Provider (VoIP) conference calls. The company also created a sandbox application for developers and customers to share and explore applications.

“For the vendors, getting greater revenues over time offers a more predictable model in terms of forecasting what those revenues might be,” says Petracca. “It also gives companies a better way to reach the small business marketplace because of the user’s lower entry cost.”

“If you go back as far as ’97-’98 people started talking about software as a service and for various reasons, including the bust, that theory didn’t live up to expectations as much as it should have,” says Bill Gurley, general partner, Benchmark Capital. “Fast forward to today and look at the success of Salesforce.com and others like Websense and Websidestory—that clearly is a business model that Wall Street loves. The multiples are incredibly high.”

Like Microsoft and IBM have done with independent software vendors, the Salesforce platform model incorporates selected application service vendors more tightly into its application and infrastructure ecosystem in an on-demand (or SaaS) framework.

6 Issue 4: 2005

Microsoft plans to hold a Web developer and designer conference in March called MIX ’06 (www.mix06.com) to outline the company’s current and future investments in Web platform technologies. O’Reilly Media Inc. President and CEO, Tim O’Reilly, who published the 16-page piece, “What is Web 2.0: Design Patterns and Business Models for the Next Generation of Software,” on his company’s Web site in September, will have a dialogue with Bill Gates at MIX ’06.

“Microsoft had made a number of investments in Web tools and technologies long before Web 2.0 started making these headlines,” says Tim O’Brien, group manager of Platform Strategy for Microsoft. “We announced enhanced tools for Web development and tools for graphic design at our Professional Developers’ Conference this past September. Our investments on the services side, even the more recent ones announced in November—Windows Live and Office Live—are platform plays.” When Internet Explorer 7 and Windows Vista roll-out this year, O’Brien says: “The RSS capabilities in [these products] are going to make what is a Web 2.0 technology still in quasi-early stage of adoption available to hundreds of millions of people… If you’re a VC looking at an early-stage company who is saying, ‘I pull traffic into my site; I sell ads; and I’ve got this really cool RSS capability’… If people stop visiting that site because they can just subscribe to what they need, they’ve got a business model issue to think through.”

Keeping just the right distance ahead of democratization is how forward-looking companies, like FeedBurner, must think. “FeedBurner has been innovating on ad insertion into feeds

for two years now,” says Costolo. “We are absolutely of the belief that publishers have to syndicate their content, distribute it, and attach monetization mechanisms to it that assume it will be consumed far away from the originating site or source. It’s just the beginning of innovations that will offer publishers and subscribers the option of becoming untethered from proprietary systems.”

J.B. Holston, CEO of Newsgator.com, an early RSS technology adopter and rapid innovator, says he really hopes Microsoft’s upcoming IE 7 and Vista releases do speed up RSS adoption exponentially. “MS has been a great ‘partner’ to us, in a ton of ways; one of which has been to share their roadmap openly. We build everything we do on Microsoft technologies and, as a result, they’ve been very open with us as we build our company because it’s good for them to have companies using their technology do well,” says Holston, who is no stranger to navigating corporate networks. Holston started Yahoo! Europe, the joint venture between Yahoo! and Ziff Davis, which he was running in Europe at the time. “If you’re a start-up, the big thing you have to do when you are potentially competing in Microsoft space is to just innovate faster than they do… The best position you can be in is if you’ve got a close relationship with them so you can know where they’re going, but you still have to cycle your products much more quickly than they can. That’s our competitive advantage. We’re always going to be a higher end, richer way to present the most relevant text, audio, and video to users,” he explains.

“It’s not just a question of how to aggregate, serve up, and synchronize feeds over mobile phones, computers,

and other devices; it’s about how to make that information most relevant to users. We have a clear path forward as Microsoft embraces RSS.”

Can you be too thin or too rich?

In the Web 2.0 environment, you’ll be hearing a lot about the notion that given the rich interactivity and all the bandwidth out there all you need is a browser and a “thin client,” a server without any real software on it.

“That’s not true,” says O’Brien. “It’s not an either/or world. Reaching customers was the disruptive force that drove the first Internet boom,” he explains. “Now, user experience on the client becomes the unique differentiator. Internet reach has become a commodity,” he asserts, noting the proliferation of desk bars, tool bars, task bars, sidebars, and other client-side pieces of technology. “Skype is a Win32 application that runs on the client. The Google toolbar is an application that runs on the client. Most of what Google and Yahoo! announced at the Computer Electronics Show was all client-side technologies that run on the PC. I think it’s interesting that Salesforce would have a Microsoft Outlook edition of their product,” he remarks, alluding to Salesforce.com’s long-time campaign for The End of Software.

The emphasis on client experience is apparent as Microsoft expands its outreach from independent, high-level software developers to include front-end graphics designers and illustrators while fine-tuning its new Expression Interactive Designer and Expression Graphic Designer development tools for Web and Windows design. Microsoft’s Mix ’06 conference in March will address optimizing the

“ Reaching customers was the disruptive force that drove the first Internet boom.” Tim O’Brien, Microsoft

continues on page 19

This special report, covering 2004 to 2005, provides detailed results of Q4 2005, summary findings for full-year 2005, and an additional year of trends. More detailed results, including an electronic version of this report, can be found on the MoneyTree™ Web site at www.pwcmoneytree.com.

Directory

Tracy T. Lefteroff Kirk [email protected] [email protected]

Investments in the fourth quarter of 2005 totaled $5.1 billion in 709 deals, down slightly from $5.4 billion in Q3 2005, but well within the range of investment levels seen over the past 14 quarters.

In 2005, venture capitalists matched 2004 by investing $21.7 billion in 2,939 deals. Full-year 2004’s $21.6 billion

marked the first increase in venture capital investing after three years of consecutive declines. Funding for later stage companies rose markedly in 2005 to $9.7 billion, while the number of companies getting venture capital for the first time increased to 901, continuing a steady year-over-year rise. Both measures were four-year highs.

$ in

bill

ions

Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1

20052000 2001 2002 2003 2004

Q3 Q4Q1

2,085 2,083 1,912 1,729 1,274 1,218 997 967 819 840 685 713 723684 699 759 680 826 662 798 704 784 742

total # of deals

0123456789

101112131415161718192021222324252627282930

709

Q2 Q3 Q4

27.910

22.400

26.312

12.970

8.365

6.699

8.056

5.999

4.435

4.565 4.342 4.768

5.543

4.706

4.932

5.105

6.1485.676

4.988

6.164

5.445

5.084

11.313

28.078

*connectedthinking

Total equity investments into venture-backed companies

Data is current as of January 24, 2006. PricewaterhouseCoopers and the National Venture Capital Association have taken responsible steps to ensure that the information contained in the MoneyTree Report has been obtained from reliable sources. However, neither of the parties nor Thomson Financial can warrant the ultimate validity of the data obtained in this manner. Results are updated periodically. Therefore, all data is subject to change at any time.

©2006 PricewaterhouseCoopers, LLP. All rights reserved. “PricewaterhouseCoopers” refers to the PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US).

8 Q4 2005 MoneyTreeTM Report

Investments by industry 2004 to 2005The Life Sciences sector (Biotechnology and Medical Devices industries, together) inched up to a five-year high in 2005 with $6.0 billion in 608 deals compared to $5.8 billion in 589 deals in 2004. Software investments slipped 10% in 2005 to $4.7 billion in 840 deals, yet easily held its position as the largest single industry category for the year, capturing 22% of total dollars and 29% of all deals. The Networking industry continued its slide, ending at $1.4 billion in 2005, an eight-year low point. The Telecommunications industry’s Wireless subcategory has become a hot spot. For full-year 2005, 152 wireless-related companies received $1.3 billion, a 24% increase over 2004’s $1.1 billion. This increase pushed the Telecommunications category to a three-year high of $2.1 billion in 2005.

$ in millions

# of deals

$ in millions

0 1,000500 1,500 2,000 2,500

0 1,000500 1,500 2,000 2,500

2005

2004

Grand Total

Undisclosed/Other

Retailing/Distribution

Consumer Products and Services

Electronics/Instrumentation

Healthcare Services

Computers and Peripherals

Business Products and Services

Financial Services

Industrial/Energy

IT Services

Media and Entertainment

Networking and Equipment

Semiconductors

Medical Devices and Equipment

Telecommunications

Biotechnology

Software840

357

247

251

210

157

149

130

123

56

89

59

67

83

73

43

5

2,939

886

340

236

249

239

183

116

131

131

70

80

69

68

65

60

40

3

2,966

5,246.3

4,147.0

1,946.8

1,705.5

2,077.8

1,554.3

900.2

612.6

646.6

435.2

461.0

592.7

420.6

383.0

297.2

207.4

1.1

21,635.3

4,703.6

3,861.6

2,129.2

2,114.1

1,778.2

1,402.1

945.1

921.1

740.5

643.6

515.4

467.5

436.8

387.4

362.0

270.5

1.5

21,680.0

Definitions of the industry categories can be found on the MoneyTree™ Web site at www.pwcmoneytree.com.



www.pwcmoneytree.com 9

Investments by industry Q4 2004, Q3 2005, Q4 2005The Life Sciences sector (Biotechnology and Medical Devices industries, together) continued its dominance in Q4 2005. Investments in the sector totaled $1.7 billion or one-third of all venture capital invested during the quarter. This represents the largest portion of overall investing the sector has attracted in a single quarter. Half of the top ten industries experienced an increase in financing from the prior quarter. The Industrial/Energy, Business Products/Services, and IT Services industries experienced the largest gains in the fourth quarter, up modestly from Q3 2005.

95

192

65

62

46

27

37

29

35

27

14

20

17

18

12

11

2

709

$ in millions

# of deals

$ in millions

0 100 200 300 400 500 600

0 100 200 300 400 500 600

Grand Total

Undisclosed/Other

Retailing/Distribution

Financial Services

Consumer Products and Services

Healthcare Services

Electronics/Instrumentation

Computers and Peripherals

Business Products and Services

Industrial/Energy

Networking and Equipment

Media and Entertainment

IT Services

Semiconductors

Telecommunications

Medical Devices and Equipment

Software

Biotechnology 94

201

69

68

56

34

37

33

33

24

12

19

16

18

13

14

1

742

101

238

65

55

71

42

31

41

37

13

17

15

16

18

25

11

2

798

Q4 05

Q3 05

Q4 04

1,068.8

1,036.6

613.0

517.1

425.1

210.3

194.8

188.8

186.0

133.5

126.7

105.2

102.5

80.2

51.3

42.7

1.5

5,084.1

1,024.2

1,133.7

604.0

586.9

531.7

195.5

197.5

354.0

154.5

122.0

66.1

96.1

67.5

97.6

81.7

131.8

0.0

5,444.7

1,266.1

1,407.5

445.5

413.4

576.1

168.7

294.1

283.9

168.7

31.3

93.5

95.4

97.2

97.2

164.7

72.0

0.6

5,675.7

Definitions of the industry categories can be found on the MoneyTree™ Web site at www.pwcmoneytree.com.




895

385

164

176

202

158

122

150

184

144

91

75

79

60

15

30

5

4

0

2,939

$ in millions

$ in millions

# of deals

0 500 1,000 1,500 2,000

0 500 1,000 1,500 2,000

913

395

204

138

221

157

122

146

165

151

95

68

52

68

8

29

5

24

5

2,966Grand Total

Other US

South Central

AK/HI/PR

Upstate NY

Sacramento/N.Cal

North Central

Southwest

Colorado

Philadelphia Metro

Midwest

DC/Metroplex

Northwest

San Diego

Texas

Southeast

LA/Orange County

NY Metro

New England

Silicon Valley

2005

2004

7,622.8

2,618.4

1,690.4

1,484.0

1,215.3

1,068.9

1,032.8

913.8

885.2

773.5

687.8

611.7

590.3

314.0

79.9

58.9

17.0

15.1

0.0

21,680.0

7,808.0

3,074.4

1,504.7

937.9

1,259.5

1,099.0

1,212.3

977.8

961.6

660.0

689.2

413.3

331.1

425.0

47.9

106.3

15.1

110.5

1.5

21,635.3

Investments by region 2004 to 2005Of the ten regions garnering the largest amounts of venture capital in 2005, three experienced double-digit increases in investing over the prior year. LA/Orange County chalked up a 58% increase in investment levels from 2004, while the Midwest and NY Metro regions both attracted 17% and 12% more dollars, respectively, than in the prior year. During 2005, Silicon Valley dominated the attention of investors as 35% of all US venture capital was invested in the region. Taken together, the top three regions—Silicon Valley, New England, and NY Metro—accounted for 55% of the dollars invested and 49% of the deals reported in 2005.




Grand Total

Other US

South Central

Upstate NY

AK/HI/PR

Sacramento/N.Cal

Colorado

North Central

Southwest

Midwest

Philadelphia Metro

DC/Metroplex

Southeast

San Diego

Northwest

LA/Orange County

NY Metro

Texas

New England

Silicon Valley

$ in millions

$ in millions

# of deals

0 500

0

222

93

42

37

34

39

31

40

51

23

33

19

17

16

2

1

8

1

0

709

230

93

37

43

47

35

36

62

40

17

36

19

11

21

3

1

10

1

0

742

100 200 300 400

100 200 300 400 500

248

109

41

49

40

34

40

61

46

20

39

9

17

21

3

2

6

10

3

798

Q4 05

Q3 05

Q4 04

1,779.0

702.6

295.5

286.5

278.2

270.7

266.7

235.3

225.0

178.0

176.1

121.0

119.7

115.3

14.0

10.2

8.6

1.5

0.0

5,084.1

2,110.5

622.3

207.0

283.2

360.4

241.3

219.2

448.8

209.3

164.0

130.7

181.8

59.2

175.1

9.2

3.8

17.9

1.0

0.0

5,444.7

1,951.8

806.1

271.4

265.2

299.4

181.7

351.8

433.3

409.3

124.7

225.9

83.1

105.3

93.5

16.1

5.6

7.9

43.1

0.4

5,675.7

Investments by region Q4 2004, Q3 2005, Q4 2005Seven of the ten largest regions in Q4 2005 recorded an increase in investing over the prior quarter. Investment levels in Texas—capturing $296 million—increased by 43% while San Diego attracted 22% more than Q3 2005. Taken together, the top three regions in Q4 2005—Silicon Valley, New England, and Texas—accounted for 55% of the dollars invested and 50% of the deals reported.




$ in millions

$ in millions

# of deals

0 250 500 750 1,000

0 500250 750 1,000

Grand Total

Undisclosed/Other

Vermont

Tennessee

Wisconsin

Rhode Island

New Mexico

Michigan

Indiana

Nevada

New Hampshire

Missouri

Ohio

Oregon

Arizona

Connecticut

Minnesota

Illinois

Utah

Georgia

Florida

Virginia

Maryland

Pennsylvania

North Carolina

Colorado

Washington

New Jersey

New York

Texas

Massachusetts

California

2005

2004

10,219.5

2,352.1

1,068.9

1,042.2

823.1

736.3

611.7

507.5

469.5

442.6

401.7

361.2

261.7

249.1

241.1

227.9

194.0

148.0

138.1

119.3

117.4

112.6

104.9

95.6

89.0

88.4

77.1

67.9

65.6

35.2

211.0

21,680.0

10,006.2

2,811.9

1,099.0

726.5

959.3

825.2

413.3

315.5

560.9

580.8

300.1

318.1

524.4

197.9

223.5

353.5

180.4

69.7

148.7

57.0

31.0

154.8

39.5

67.3

131.8

24.0

45.4

57.1

80.5

5.1

327.1

21,635.3

1,208

331

158

124

77

114

75

56

74

97

74

55

60

30

51

44

29

26

28

31

12

26

7

10

21

16

13

12

23

5

52

2,939

1,181

348

157

147

86

114

68

53

91

84

71

58

76

28

52

50

32

10

29

31

11

26

6

9

19

8

7

10

23

4

77

2,966

Investments by state 2004 to 2005




100 200 300 400

100 200 300 400

289

86

42

31

32

30

17

16

16

11

9

7

17

12

10

9

6

5

5

5

8

6

5

4

4

1

2

2

6

3

13

709

$ in millions

$ in millions

# of deals

0

0

Total

Undisclosed/Other

Nevada

Ohio

Iowa

Washington, DC

Delaware

Arizona

Tennessee

Utah

Oregon

Michigan

New Hampshire

Missouri

Connecticut

Wisconsin

Minnesota

Florida

Georgia

Virginia

New Mexico

Illinois

North Carolina

New Jersey

Colorado

Pennsylvania

Maryland

New York

Washington

Texas

Massachusetts

California 316

76

37

25

33

23

14

21

20

18

13

3

15

15

21

7

3

8

3

9

4

8

6

6

7

2

2

1

7

3

16

742

331

98

41

28

36

24

17

21

16

14

13

3

18

18

15

10

4

8

5

7

7

6

4

6

0

0

2

2

9

2

33

798

Q4 05

Q3 05

Q4 04

2,337.9

660.7

295.5

236.6

190.7

154.5

121.8

115.3

109.9

91.2

66.8

60.9

56.2

56.0

55.8

55.0

52.6

51.1

42.9

39.7

39.5

28.1

26.0

23.5

23.2

14.0

12.8

12.1

12.0

11.0

30.8

5,084.1

2,699.3

532.7

207.0

179.0

141.6

125.8

96.9

175.1

191.8

175.4

28.4

13.3

81.9

100.8

159.7

49.5

9.7

59.9

26.4

37.3

15.2

39.3

30.1

9.4

51.3

4.7

1.6

0.0

9.4

87.1

105.3

5,444.7

2,619.1

753.2

271.4

162.3

134.6

283.0

123.9

93.5

110.0

111.7

78.9

11.0

83.1

166.6

100.7

75.0

24.8

47.9

5.4

32.9

81.8

19.4

49.6

35.5

0.0

0.0

38.0

5.4

16.0

22.5

118.7

5,675.7

Investments by state Q4 2004, Q3 2005, Q4 2005




$ in millions

$ in millions

# of deals

0 1,000 2,000 3,000 4,000 5,000

0 1,000 2,000 3,000 4,000 5,000

Grand Total

Later Stage

Expansion

Early Stage

Startup/Seed185

853

1,195

733

2,966

175

747

1,065

952

2,939

2005

2004

735.9

3,396.2

7,821.0

9,727.0

21,680.0

406.6

3,986.7

9,257.0

7,985.0

21,635.3

$ in millions

$ in millions

# of deals

42

174

254

239

709

0 500 1,000 1,500

0 500 1,000 1,500

Grand Total

Later Stage

Expansion

Early Stage

Startup/Seed 49

178

252

263

742

47

221

301

229

798

Q4 05

Q3 05

Q4 04

98.2

938.4

1,709.8

2,698.3

5,444.7

120.7

1,070.6

2,177.4

2,307.0

5,675.7

75.1

882.4

1,837.3

2,289.2

5,084.1

2004 to 2005

Q4 2004, Q3 2005, Q4 2005

Investments by stage of developmentFor full-year 2005, Later stage funding rose 22% to $9.7 billion in 952 deals compared to $8.0 billion in 2004. More notably, Later stage accounted for 45% of all venture capital dollars, the highest proportion in the 11-year history of MoneyTree research. The continuing shift toward Later stage investing over the past five years reflects venture capitalists ongoing support of existing portfolio companies via additional follow-on rounds.

Funding for Start-Up and Early stage companies slipped only slightly to $4.1 billion in 922 deals compared to $4.4 billion in 2004, indicating sustained interest in longer term investment horizons.

As activity remained focused on opposite ends of the barbell, investing in Expansion stage companies fell to its lowest point in nine years: $7.8 billion in 1,065 deals. In 2004, 1,195 Expansion stage deals amounted $9.3 billion.

Definitions of the stage of development categories can be found on the MoneyTree™ Web site at www.pwcmoneytree.com.




$ in millions

$ in millions

# of deals

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000

Total

Seventh & Beyond

Fourth, Fifth, & Sixth

Second & Third

First

901

1,021

740

277

2,939

865

1,015

835

251

2,966

2005

2004

5,283.2

7,715.0

6,535.7

2,146.1

21,680.0

4,608.5

7,897.8

7,565.6

1,563.4

21,635.3

$ in millions

$ in millions

# of deals

0 1,000 2,000 3,000 4,000 5,000

0 1,000 2,000 3,000 4,000 5,000

Grand Total

Later Stage

Expansion

Early Stage

Startup/Seed185

853

1,195

733

2,966

175

747

1,065

952

2,939

2005

2004

735.9

3,396.2

7,821.0

9,727.0

21,680.0

406.6

3,986.7

9,257.0

7,985.0

21,635.3

$ in millions

$ in millions

# of deals

42

174

254

239

709

0 500 1,000 1,500

0 500 1,000 1,500

Grand Total

Later Stage

Expansion

Early Stage

Startup/Seed 49

178

252

263

742

47

221

301

229

798

Q4 05

Q3 05

Q4 04

98.2

938.4

1,709.8

2,698.3

5,444.7

120.7

1,070.6

2,177.4

2,307.0

5,675.7

75.1

882.4

1,837.3

2,289.2

5,084.1

Investments by sequence of financingNew investments by venture capitalists hit a four-year high with 901 companies receiving their first round of institutional venture capital for a total of $5.3 billion in 2005. Last year, 865 companies attracted $4.6 billion. The increase reflects venture capital firms’ appetite for fresh ideas to balance existing investments.

A total of 236 companies received financing for the first time in Q4 2005, down slightly from 225 companies during Q3, with the amount invested practically unchanged at $1.2 billion.

2004 to 2005

Q4 2004, Q3 2005, Q4 2005

$ in millions

$ in millions

# of deals

236

230

169

74

709

0 500 1,000 1,500

0 500 1,000 1,500

Total

Seventh & Beyond

Fourth, Fifth, & Sixth

Second &Third

First 225

260

186

71

742

236

254

234

74

798

Q4 05

Q3 05

Q4 04

1,207.0

2,056.9

1,967.8

444.0

5,675.7

1,193.6

1,913.5

1,418.3

558.6

5,084.1

1,218.8

1,915.0

1,615.0

695.9

5,444.7

Definitions of the sequence of financing categories can be found on the MoneyTree™ Web site at www.pwcmoneytree.com.




Full-year 2005 most active venture investorsThe most active venture investors in the US closed 16 or more deals each during 2005. Of the more than 8,600 transactions reported in 2005, the most active firms accounted for 2,762, approximately 32% of the total. The top 10 firms accounted for about 7% of the deals completed during the year. Draper Fisher Jurvetson topped the 2005 list with a total of 80 deals made during the year. New Enterprise Associates came in next with 73 deals. U.S. Venture Partners, Venrock Associates, Polaris Venture Partners and Sequoia Capital were also at the top of the list, reporting more than 49 deals each in 2005.

# of Investor Location DealsDraper Fisher Jurvetson Menlo Park, CA 80New Enterprise Associates Baltimore, MD 73U.S. Venture Partners Menlo Park, CA 71Venrock Associates New York, NY 59Sequoia Capital Menlo Park, CA 49Polaris Venture Partners Waltham, MA 49Kleiner Perkins Caufield & Byers Menlo Park, CA 48Intel Capital Santa Clara, CA 47Accel Partners Palo Alto, CA 46Morgenthaler Ventures Menlo Park, CA 45TL Ventures Wayne, PA 43Mayfield Fund Menlo Park, CA 42Village Ventures Williamstown, MA 42Domain Associates Princeton, NJ 42InterWest Partners Menlo Park, CA 40North Bridge Venture Partners Waltham, MA 40Menlo Ventures Menlo Park, CA 39Canaan Partners Rowayton, CT 38Sevin Rosen Funds Dallas, TX 38Benchmark Capital Menlo Park, CA 37Redpoint Ventures Menlo Park, CA 37Oak Investment Partners Westport, CT 36Austin Ventures, L.P. Austin, TX 35MPM Capital Boston, MA 35Enterprise Partners Venture Capital La Jolla, CA 35Bessemer Venture Partners Larchmont, NY 34ComVentures Palo Alto, CA 34Greylock Waltham, MA 34Highland Capital Partners Lexington, MA 34Frazier Healthcare and Technology Ventures Seattle, WA 32Mobius Venture Capital Palo Alto, CA 32Sutter Hill Ventures Palo Alto, CA 31Three Arch Partners Portola Valley, CA 31ARCH Venture Partners Chicago, IL 29Atlas Venture, Ltd. Waltham, MA 293i (US) Waltham, MA 29MD Dept. of Business & Economic Development Baltimore, MD 29Battery Ventures Wellesley, MA 29Advanced Technology Ventures Waltham, MA 27BA Venture Partners Foster City, CA 27Foundation Capital Menlo Park, CA 27Alta Partners San Francisco, CA 27Sanderling Ventures San Mateo, CA 27Flagship Ventures Cambridge, MA 25Novak Biddle Venture Partners Bethesda, MD 25Versant Ventures Menlo Park, CA 25DCM - Doll Capital Management Menlo Park, CA 25Charles River Ventures Waltham, MA 24

# of Investor Location DealsMD Technology Development Corporation Columbia, MD 24General Catalyst Partners Cambridge, MA 24Palomar Ventures Santa Monica, CA 24Prospect Venture Partners Palo Alto, CA 24Motorola Ventures Schaumburg, IL 24Oxford Bioscience Partners Boston, MA 24Walden International San Francisco, CA 24Mohr Davidow Ventures Menlo Park, CA 24Sigma Partners Menlo Park, CA 23EnerTech Capital Wayne, PA 23Pequot Capital Management Westport, CT 23Norwest Venture Partners Palo Alto, CA 22SV Life Sciences Advisers Boston, MA 22Ignition Partners Bellevue, WA 22Rho Ventures New York, NY 22Bay Partners Cupertino, CA 21CMEA Ventures San Francisco, CA 21St. Paul Venture Capital Eden Prairie, MN 21Alloy Ventures Palo Alto, CA 21VantagePoint Venture Partners San Bruno, CA 21J.P. Morgan Partners New York, NY 21Labrador Ventures Palo Alto, CA 21Blue Chip Venture Company Cincinnati, OH 21Goldman, Sachs & Co. New York, NY 20Solstice Capital Boston, MA 20Intersouth Partners Durham, NC 20Sierra Ventures Menlo Park, CA 20Warburg Pincus New York, NY 19Lightspeed Venture Partners Menlo Park, CA 19Globespan Capital Partners Boston, MA 19Matrix Partners Waltham, MA 19Columbia Capital Alexandria, VA 19Wasatch Venture Fund Salt Lake City, UT 19Prism Venture Partners Westwood, MA 19The Venture Capital Fund of New England Wellesley, MA 18El Dorado Ventures Menlo Park, CA 18River Cities Capital Funds Cincinnati, OH 18Delphi Ventures Menlo Park, CA 17Kodiak Venture Partners Waltham, MA 17Storm Ventures Menlo Park, CA 17Bain Capital Boston, MA 17Trident Capital Palo Alto, CA 17Noro-Moseley Partners Atlanta, GA 17Centennial Ventures Denver, CO 16De Novo Ventures Menlo Park, CA 16Rustic Canyon Partners Santa Monica, CA 16Band of Angels Menlo Park, CA 16




Q4 2005 most active venture investorsThe most active venture investors in the US closed five or more deals each in Q4 2005. Of the more than 2,090 transactions reported in Q4 2005, the most active firms accounted for 639, approximately 31% of the total. The top 10 firms accounted for 8% of the deals completed in the quarter. Draper Fisher Jurvetson topped the list with a total of 22 deals, while New Enterprise Associates came in next with 18 deals. Venrock Associates and Polaris Venture Partners were also at the top of the Q4 2005 list, reporting 15 or more deals each during the quarter.

# of Investor Location DealsDraper Fisher Jurvetson Menlo Park, CA 22New Enterprise Associates Baltimore, MD 18Venrock Associates New York, NY 17Polaris Venture Partners Waltham, MA 15Menlo Ventures Menlo Park, CA 14U.S. Venture Partners Menlo Park, CA 14Intel Capital Santa Clara, CA 14TL Ventures Wayne, PA 14Kleiner Perkins Caufield & Byers Menlo Park, CA 12Sequoia Capital Menlo Park, CA 12MD Dept. of Business & Economic Development Baltimore, MD 12InterWest Partners Menlo Park, CA 11Mayfield Fund Menlo Park, CA 11Village Ventures Williamstown, MA 11Redpoint Ventures Menlo Park, CA 11MPM Capital Boston, MA 11Sevin Rosen Funds Dallas, TX 11Atlas Venture Waltham, MA 103i (US) Waltham, MA 10North Bridge Venture Partners Waltham, MA 10Frazier Healthcare and Technology Ventures Seattle, WA 10Austin Ventures Austin, TX 10BA Venture Partners Foster City, CA 9Canaan Partners Rowayton, CT 9De Novo Ventures Menlo Park, CA 9Alta Partners San Francisco, CA 9Three Arch Partners Portola Valley, CA 9Bessemer Venture Partners Larchmont, NY 8Flagship Ventures Cambridge, MA 8Tech Coast Angels Laguna Hills, CA 8Sutter Hill Ventures Palo Alto, CA 8VantagePoint Venture Partners San Bruno, CA 8Walden International San Francisco, CA 8ARCH Venture Partners Chicago, IL 7ComVentures Palo Alto, CA 7Bay Partners Cupertino, CA 7Palomar Ventures Santa Monica, CA 7EnerTech Capital Wayne, PA 7River Cities Capital Funds Cincinnati, OH 7

# of Investor Location DealsAccel Partners Palo Alto, CA 7Domain Associates Princeton, NJ 7Morgenthaler Ventures Menlo Park, CA 7Mohr Davidow Ventures Menlo Park, CA 7Greylock Waltham, MA 7Advanced Technology Ventures Waltham, MA 6Battery Ventures, L.P. Wellesley, MA 6Oak Investment Partners Westport, CT 6CMEA Ventures San Francisco, CA 6Intersouth Partners Durham, NC 6MD Technology Development Corporation Columbia, MD 6Storm Ventures Menlo Park, CA 6Stonehenge Capital Company Baton Rouge, LA 6Azure Capital Partners San Francisco, CA 6General Catalyst Partners Cambridge, MA 6Alloy Ventures Palo Alto, CA 6Pequot Capital Management Westport, CT 6Prospect Venture Partners Palo Alto, CA 6Mobius Venture Capital Palo Alto, CA 6August Capital Management Menlo Park, CA 6Labrador Ventures Palo Alto, CA 6Motorola Ventures Schaumburg, IL 6Oxford Bioscience Partners Boston, MA 6Warburg Pincus New York, NY 6Goldman, Sachs & Co. New York, NY 5Rho Ventures New York, NY 5Sierra Ventures Menlo Park, CA 5Paladin Capital Management Washington, DC 5Ignition Partners Bellevue, WA 5Sherbrooke Capital Partners Newton Lower Falls, MA 5ProQuest Investments Princeton, NJ 5IDG Ventures Boston Boston, MA 5RRE Ventures LLC New York, NY 5Advantage Capital Partners New Orleans, LA 5Foundation Capital Menlo Park, CA 5Trident Capital Palo Alto, CA 5Vanguard Ventures Palo Alto, CA 5Trinity Ventures Menlo Park, CA 5Highland Capital Partners Lexington, MA 5


1,600

0

3,200

4,800

6,400

8,000

$ in

mill

ions

Q2Q1Q4Q3Q2Q12003 2004 2005

Q3 Q4Q1

45 46 34 60 55 57 60 66 59 56 57 51

total # of deals

Q2 Q3 Q4

2,018.6

1,216.7

2,724.9

5,719.7

3,094.63,352.3

5,366.5

6,449.3

5,387.9

7,304.5

5,808.7

6,710.1$

in m

illio

ns

# of companies that went public

Q2Q1Q4Q3Q2Q1

1317921 1010 1719272429

2004 2005Q3 Q4Q1Q2 Q3 Q4

164.077.2 732.8

1,048.7

2,721.1

2,077.8

3,225.62,990.4

720.7 714.1

1,458.1

0

1000

2000

3000

4000

2003

1,568.1

Funds raised by venture capital firms Q1 2003 to Q4 2005A healthy fundraising climate in the fourth quarter of 2005 capped off the most active year for venture capital commitments since 2001, according to Thomson Venture Economics and the National Venture Capital Association. In the fourth quarter, 51 venture funds raised $6.7 billion. The entire year saw 183 funds raise $25.2 billion, the highest yearly total for venture capital firms since 2001 when 309 funds raised $38 billion.

Venture-backed initial public offerings Q1 2003 to Q4 2005Seventeen venture-backed companies raised $1.6 billion through Initial Public Offerings (IPOs) in the fourth quarter of 2005. The fourth quarter IPO activity mirrored full-year 2005 which was characterized by a significantly weak IPO market. For the full-year 2005, 56 venture-backed IPOs raised a total of $4.5 billion, representing a 40% decline in volume from 2004.

BS

-BS

-06-

0443

-A.0

2/06

.LM

T

Source: Thomson Financial Venture Economics/National Venture Capital Association

Note: The figures take into account the subtractive effect of downsized funds.

Disclaimer: Data is current as of February 3, 2006. Data is continuously updated and is therefore subject to change.

Copyright 2006 Thomson Financial. All Rights Reserved.

Source: Thomson Financial Venture Economics/National Venture Capital Association

Disclaimer: Data is current as of January 3, 2006. Data is continuously updated and is therefore subject to change.

Copyright 2006 Thomson Financial. All Rights Reserved.


user experience using both the browser and the rich client software.DFJ’s Stavropoulous, who notes that Google is “clearly going after the desktop” isn’t convinced about Microsoft’s mixed approach for optimizing the user experience. “There are solutions that are blurring the line between what’s the desktop, what’s the ‘Net and what’s in-between,” he says. “As networks become faster and technologies develop that are able to push things on the edge even with intermittent or nonexistent connections, it makes the rich client/thin client debate irrelevant.”

Open source and Web 2.0

No discussion of Web 2.0’s community-oriented character should end without touching on open source innovations.

In 2000 Laszlo Systems started up as a pioneer of next-generation Web application user interface technology, sold as proprietary server software. “In 2004, as the next generation of the Web approached rapidly, it became clear that the best way for us to maintain our market leadership in competition with much larger entrants was to go open source, harnessing the talent and enthusiasm of a global community of developers,” says CEO Steve Ciesinski, who joined the company in March of that year. Since the company went open source with OpenLaszlo in October 2004, it has had over 120,000 downloads of its Web 2.0 building blocks technology. Laszlo has adopted its own platform to build Laszlo mail, a rich Web mail and contact application, the latter a centerpiece of the vision the company has around an integrated “digital life” communications suite. “Every time you click you won’t get a new page,

refreshed and repainted like the clunky old Web mail products,” says Ciesinski. “In this environment, the whole page metaphor is irrelevant. There’s no back button. Everything is drop and drag. It’s a full application and it happens to live on the Web.”

Pandora, a recently launched Web 2.0 company, which owns a proprietary database of music categorized by professional musicians, used OpenLaszlo to quickly build its zero-install music discovery service. Pandora CTO, Tom Conrad, tips his hat to OpenLaszlo saying: “We considered everything you can imagine: plain old HTML, AJAX, Flex… In the end, Laszlo was the clear winner on all fronts—mature, reliable, and the perfect tool for the job. The outcome was only remarkable in that the decision was made by some of the most capable AJAX developers on the planet.”

“Overall,” concludes Petracca, “I think we’re seeing a more stable, positive business environment in which young companies have more latitude to develop the fundamentals without the same degree of pressure to create incredible shareholder value overnight.”

“Everything’s cyclical, right?” Gurley laughs. “The time to do killer Internet investing was when no one wanted to.”

nextwave feature contributor, Janice K. Mandel, is an independent writer specializing in fast-growth businesses and the people who make them run. She can be reached at [email protected].

DirectorySTEVE [email protected] [email protected] [email protected] [email protected]. [email protected] [email protected] O’[email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

Nonpublic companies are continually challenged to determine the fair value of their enterprises. Some nonpublic companies have the benefit of arm’s length cash transactions with third parties, which provide evidence of fair value. Many nonpublic companies, however, have not consummated such transactions and thus do not have such evidence of fair value. This becomes particularly important when a nonpublic company plans to go public. Many issues may surface when a company fails to correctly determine the fair value of its equity securities that can lead to SEC staff inquiries about the company’s issuance of “cheap stock” during the IPO process. Cheap stock refers to common stock issued at a price below the IPO price and equity awards (e.g., stock options) issued with an exercise price below the IPO price, both within one year prior to the filing of the initial registration statement.

In June 2004, the AICPA issued a practice aid entitled Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The practice aid provides financial-statement preparers, valuation specialists, and auditors (internal and external) with best practice guidance for valuing privately-held-company equity securities, including stock-based-compensation awards that are within the scope of FAS 123(R).

Under FAS 123(R) the issuance of cheap stock may cause greater changes in compensation cost than under APB 25. For example, a nonpublic company may grant a typical-fixed, at-the-money stock option six months before its IPO under the accounting

requirements of FAS 123(R). The offering price at the time of the IPO is $10 higher than the option’s exercise price on the grant date. If in the six-month period preceding the IPO there was no discrete event that increased the fair value of the underlying stock, the SEC will presume that the option was a cheap-stock grant. This means that, in effect, the company issued an in-the-money stock option, with the underlying stock’s fair value exceeding the option’s exercise price on the grant date. In this case, the company would have to rerun its option-pricing model and record a “cheap stock” charge to reflect the fact that the option was issued in-the-money and therefore has a larger fair value than the same option granted at-the-money.

Although the AICPA’s practice aid has no authoritative status, the SEC staff expects companies in the IPO process to make the disclosures that the practice aid recommends for periods preceding the IPO. The practice aid also specifies enterprise- and industry-specific attributes that should be factored into a determination of fair value (e.g., the fair value of stock-based-compensation awards that a company grants to employees), and describes important steps that a company should take when obtaining or performing a valuation.

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Issues regarding cheap stock and IPOs for private companies

This information was excerpted from PwC’s monograph, FAS 123(R), “Share-Based Payment”—A multidisciplinary approach, 2nd Edition. To obtain an electronic copy of the full version of this publication, please visit our CFO Direct Web site (www.cfodirect.com) and click on the “DataLine 2006:02” link on the homepage.


PwC is helping numerous companies assess the impact of FAS 123(R). This experience places us at the forefront of understanding the complex issues that are involved in implementing this accounting standard, making us better prepared to help companies choose among the various valuation models that are now available, select

assumptions under those models, and deal with a host of other implementation decisions. PwC can also help companies consider potential changes in their compensation programs.

If you have questions on accounting for stock-based-compensation programs, valuation techniques, FASB developments, plan design,

tax implications, or any of the complex issues related to this topic, or if you would like help in assessing the impact that the accounting rule has on your company, contact your PwC engagement partner. If your company currently does not receive services from us, please call our Technology Industry Hotline at 1.877.PwC.TICE or visit our Entrepreneur

Resource Centre at our VisionToReality site at www.pwcV2R.com and click on “Find A Professional.”

How PricewaterhouseCoopers can help


“Innovation, disruption, improving the way we live—those are the qualities that make a product interesting to a venture capitalist,” says Tracy T. Lefteroff, Global Managing Partner of Private Equity & Venture Capital Industry Services at PricewaterhouseCoopers. “Add to that a strong management team with the ability to execute and you’ve got the ‘perfect storm’ for investment dollars.”

Today’s VCs are investing in breakthrough ideas and products that will change the way we work, play, and even stay healthy. That philosophy is reflected in the 2005 MoneyTree™ FutureCentricSM list of venture-backed companies,

which is a representative sample of entrepreneurial companies building ideas that are shaping the future.

Some of the macro trends driving VC investing during 2005 were the continued intersection of IT and life sciences, consumer adoption of technology, and the focus on national and personal security solutions.

The intersection of technology and life sciences continues to offer great strides in healthcare. One innovation affecting healthcare delivery is InTouch Health’s “Robot Doctors”. The robot—called RP-7 (for Remote Presence 7)—uses telecommunications and mobile robotic technology to allow physicians to remotely visit patients—hearing, seeing,

talking, and moving as if they were actually in the hospital room. RP-7 is deployed in over 40 hospitals around the US and Europe and has been featured on the hit television show “ER”.

Alexander “Sandy” Spiro, Jr., senior managing director at VC firm Beringea, was intrigued by the InTouch product due to its remote presence capabilities. “The RP-7 robot has tremendous application, particularly in acute care. The product brings the critical expert knowledge to bear when and where that expert knowledge is needed. The doctor is not physically there—but is actually there.”

In the IT world, Motion Computing’s Tablet PCs are already changing the

Successfully shaping the future: MoneyTree™ FutureCentricSM companies 2005

According to PricewaterhouseCoopers’ Trendsetter Barometer, CEOs of the nation’s fastest-growing private companies are rebounding from effects of the third quarter’s disastrous hurricanes, business interruptions, and shocking energy prices. They are now taking a more optimistic view of the business climate for the next 12 months, coupled with

somewhat diminished concern about market demand, energy prices, interest rates, and profitability. But despite their more upbeat perspective, they are proceeding with caution. Going forward, they have shaved their revenue growth target and have scaled back their investment and hiring plans.

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Quick Comparison

3Q 05 4Q 05

Optimistic about US economy 62% 71%Optimistic about world economy 54% 68%Expected US economy growth 3.1% 3.3%Expected industry sector growth 7.6% 8.1%Company revenue growth target 23.6% 22.2%

Potential barriersWeak market demand 57% 50%Energy prices 41% 33%Higher interest rates 32% 27%Decreasing profitability 30% 24%Planning major new investments 49% 46%Rate of new investments 13.9% 12.6%Expecting new hiring 79% 80%Rate of new hiring 11.2% 9.0%

Source: PricewaterhouseCoopers’ Trendsetter Barometer interviewed CEOs of 339 privately-held product and service companies identified in the media as the fastest growing US businesses over the last five years. Surveyed companies range from approximately $5-150 million in revenues. Interviewing for 4Q 05 was completed January 24, 2006. For more information on this report, visit www.barometersurveys.com.

24 Issue 4: 2005


way professionals such as healthcare workers, real estate agents, and insurance adjusters work. These go-anywhere computers, designed to replace clipboards, allow users to enter information via handwriting or speech-recognition software. For example, HealthSouth has deployed the Tablet PCs to physical therapists in its rehabilitation facilities and, as a result, has seen a significant improvement in patient and clinician satisfaction as well as productivity.

For the “regular guy” or “tween”—adopting technology

The FutureCentric list also features products that top everyone’s wish list—such as a product which delivers the “digital home of the future” and a must-have cell phone for “tweens.”

Dedicated Device’s digital home product is a networking and media server, delivering networked access to videos and digital entertainment, photos and music throughout the home. Today’s tech-savvy homeowner is embracing the idea of a fully wired—or wireless—home where all digital media and entertainment can be shared throughout the house.

Jeff Moeser, co-founder and executive vice president of Dedicated Devices, sees the product as extending the use of digital media in people’s lives. “Homebuyers today have grown up with computers, iPods, and digital cameras and they want to make the most of their digital investments. With our product, customers have access to all their pictures, music, and video—anywhere in their house.”

Not only are today’s homeowners a focus, the VC community didn’t ignore those consumers of tomorrow—the “tween” segment. Kids between the ages of eight and twelve, begging their parents for their own cell phone, can now have one especially designed for them by Firefly Mobile. Parents program these brightly colored phones so that only certain numbers can call

or be called from the unit, effectively providing parental controls for cell phone use.

Security products continue to receive serious investment dollars—from companies focused on national security to companies focused on personal password security. An example: Reveal Imaging provides very small bomb screening devices in airports that improve work flow and passenger experience—and make air travel safer.

On a more personal level, by year-end 2006, it is likely that all financial institutions will be required to provide second level authentication—meaning something else besides the password when signing into financial accounts. BioPassword has developed a patented technology that provides personal password security through second-level Internet authentication.

According to Gerard H. Langeler, of OVP Venture Partners, “Essentially almost every other mechanism for second-level authentication requires additional hardware. BioPassword is a great, proven technology that provides second-level authentication based on your keystroke patterns. And, there’s really no way to duplicate someone’s keystroke patterns—they’re too subtle.”

Breakthrough ideas and killer management teams

These are just a few examples of the new technologies and products on the horizon—all made possible by venture capital dollars. The common element among these companies is breakthrough ideas that bring change and widespread impact to industries and consumer experiences. Setting aside the great ideas, what else about these companies gets the attention of VCs and makes them attractive investments? Overwhelmingly, the answer is killer management teams.

According to VCs and some of the companies on the FutureCentric list,

“ Our companies are our babies… they’re beautiful; they’re smart.”

“ The exit is harder than the investment decision.”

“ A lot of our best investments involve small amounts of money.”

“ I like the times between board meetings. That’s when the real work gets done.”

“ The thing we’re bad at being able to predict is human performance.”

“ A board that has different viewpoints is a stronger board.”

“ The whole purpose of early-stage investing is to help create category-defining companies.”

“ I don’t see a lot of white-space opportunities.”

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Robbie GimblettAssurance and Business Advisory Services Partner

photographer: John Crawford26 Issue 4: 2005


killer management teams can be comprised of executives with technical credibility in their field of expertise or can be serial entrepreneurs. Is seasoned business experience more critical in a team than entrepreneurial experience? The consensus was that while both are important, the most critical factor is the ability to execute on an idea.

In the case of InTouch Health, the executive team was instrumental in developing one of the first surgical robots to do micro-surgery; a technique that is being very widely used around the world today. Clearly the team had the expertise in bringing a robotic solution to the healthcare field. According to Spiro, “The individuals on the management team have been together for a long period of time, have been very successful in other ventures, and are still together. They’re good, solid producers with good direction and focus.”

The technological competence of the BioPassword team was what intrigued Gerald Langeler at OVP. “The BioPassword team brought a lot of technical credibility to the table. They didn’t have the start-up experience that some of our companies have, but they do have a lot of technical credibility and experience producing products like this.”

Jeff Bussgang, of IDG Ventures, concurs with the idea that technical credibility is a requirement for a great management team. “The Reveal Imaging team was a group of executives from the two leading bomb detection companies. Only a handful of people in the world know how to build these devices and this team had previously built four of the six devices that had been approved by the TSA. We knew this was the absolute dream team for bomb detection.”

Jeff Moeser and his team at Dedicated Devices possessed technical credibility and had a track record of entrepreneurial success.

According to Moeser, what excited investors about Dedicated Devices was not only their ideas and the market potential but also the “killer team with a track record of ideation, setting standards, winning awards, and getting products to market very efficiently.”

Advancing the way we live, work, and play, this year’s FutureCentric list is comprised of companies with killer teams and breakthrough ideas. As Lefteroff observed, “The entire process of venture capital funding ensures new ideas and technologies get to market and meaningfully change people’s lives.”

To view the entire list of FutureCentric companies, visit the MoneyTree Web site at www.pwcmoneytree.com.

nextwave feature contributor Julie Pusey is an independent writer who focuses on the technology, telecommunications, and life sciences sectors. She can be reached at [email protected].

DirectoryJEFFREY BUSSGANG [email protected] H. [email protected] T. LEFTEROFF [email protected] K. [email protected] “SANDY” SPIRO, [email protected]

If you’d like to contact the nearest PricewaterhouseCoopers’ venture capital expert, please call our Technology Industry Hotline at 1.877.PwC.TICE or visit our Entrepreneur Resource Centre at our VisionToReality site: www.pwcV2R.com and click on “Consult A Professional.”

Business AdvisorsWhether your company is an emerging business seeking venture capital, or an established company seeking to expand through a merger, acquisition, joint venture, or strategic alliance, you can rely on PricewaterhouseCoopers for a full range of support services. PricewaterhouseCoopers’ global presence, extensive knowledge of capital markets, and network of financing relationships provides access and introductions to many sources of funds—both domestic and international.

Since PricewaterhouseCoopers is the first choice for accounting services among the nation’s top 100 technology-based venture capital firms, we are knowledgeable about the issues that arise between entrepreneurs and venture capitalists. We excel at:– Assisting you in identifying financing sources– Serving as your advisor as you prepare for an

IPO or position yourself to be acquired– Providing due diligence and valuation services

for acquisitions

If you’d like to contact the nearest PricewaterhouseCoopers’ venture capital expert, please call our Technology Industry Hotline at 1.877.PwC.TICE or visit our Entrepreneur Resource Centre at our VisionToReality site at www.pwcV2R.com and click on “Find A Professional.”

www.pwc.com/technologywww.pwcnextwave.com

About PricewaterhouseCoopersThe member firms of the PricewaterhouseCoopers network (www.pwc.com) provide industry-focused assurance, tax, and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 130,000 people in 148 countries across our network work collaboratively using Connected Thinking to develop fresh perspectives and practical advice.

“PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

©2006 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US). BS.BS.06-0443.02/06.LMT

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