Chairman-elect US National Venture Capital Association; Cofounder and General Partner, DCM
35 years of US Venture Capital — A Historical Perspective for China
2007 CVCA Annual Meeting& China Venture Capital/Private Equity Summit November 2, 2007
Dixon Doll
Agenda Evolution of U.S. VC industry, why a flourishing
VC industry is important for China Proper role of public policy Putting U.S. lessons learned in context for China
going forward – key messages
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US Venture Capital Investment in Perspective
US GDP $12.5 trillion annually Hedge fund intake $1.5 trillion over last 3 years estimated Mutual fund intake $158 billion in 2006 Buyout intake $103 billion in 2006 Venture capital intake $28.6 billion in 2006
• Venture capital fundraising & investment Is 0.2% of total GDP
Source: BLS website, Investment Company Institute, Thomson Financial, NVCA
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Venture-Backed EmploymentVC-Backed US Jobs (millions) As a % of total US Pvt Jobs in 2006
Outpaces 2003 - 2006 Total US Job Growth
VC-Backed Jobs = 9%
Source: Venture Impact 2006 by Global Insight
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Global Insight Study In 2006, venture backed companies:
• Provided 10.4 million U.S. jobs• Had sales of $2.3 trillion
Represents 17.6% of GDP Still dominated venture-created sectors
• 56% of biotech revenue• 78% of computer and peripherals revenue• 94% of computer and peripherals jobs• 88% of software sector jobs
Outgrew the economy 2003-2006 in every sector
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Source: Venture Impact 2006 by Global Insight
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“Buy Low… Sell High” Is Easier if You Really Buy Low!
Company Total Venture Investment $M
Recent Market Cap/ Acq Price
$M (4/2007)Cisco 3 163,000eBay 7 45,890Amazon.com 8 18,640Apple 9 78,000YouTube 12 1,650Google 40 150,000JetBlue 173 2,000WebVan 441 0
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Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data: Thomson Financial
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VC Investment Peaked in 2000; Recently 20-23% of Peak; 2006 Was Higher
Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data: Thomson Financial
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IPO Levels Jumped in 2004 but not Sustained; New Hope in 2007?
Source: Thomson Financial/National Venture Capital Association
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State of Venture Capital – at Steady State Deal Flow and Equity into Venture-Backed Companies
Source: PricewaterhouseCoopers – NVCA Moneytree™ report, Data: Thomson Financial
Amount Invested ($B)
Dollars Raised by U.S. VC Funds ($B)
$9.2 $11.2 $12.5
$46.3
$87.7
$36.4
$22.2 $19.7 $22.5 $24.0 $26.7
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Key U.S. VC Building Blocks… Capital formation
• Prudent man rule – enabled pension investment• LP laws• Capital gains tax reduction
Empowered entrepreneurs• Capital gains tax reductions• Stock options/team building tools• Reasonable bankruptcy laws
Protect companies – IP laws Abundant customers willing to do business with SMEs Exit markets – the NASDAQ Face-to-face investing/proximity Cultural acceptance
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Building Blocks of the U.S. Venture Capital Industry
Unparalleled university research High quality universal education Proximity to talented entrepreneurs and engineers Deep, liquid transparent capital markets
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The Number of U.S. VC Firms has Peaked . . . Thankfully
At Year End # Venture Firms
Capital Under Mgt
1970 28 $1B1980 89 $4B1990 395 $30B2000 881 $228B2001 946 $255B2006 798 $235B
Source: 2007 NVCA Yearbook, prepared by Thomas Financial
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United States- 56% Since 2000
Europe- 60% Since 2000
Israel- 65% Since 2000
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Note: Chart scales vary for claritySource: Ernst & Young/Dow Jones Venture One
Number of Active IT VC Firms Declining
2206
1767
13641157
1012 960
974862
661556
420 391
376
299
221 205
130
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Globalization of VC and Technology
VC is truly a global business• Entrepreneurs live and start companies everywhere • Low-cost centers of technological excellence distributed globally• Other potential markets to emerge (India, Eastern Europe, Russia)
Portfolio companies are increasingly global• Companies must utilize global centers of technological excellence• International markets more important for select disruptive technologies• Companies must access many international markets from the get go
Emergence of many new important sectors like Cleantech
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Cleantech Investments (US $M)
Source: Dow Jones VentureOne and Ernst & Young
25% CAGR
21% CAGR
195% CAGR
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Important VC – Related Public Policy Issues
Tax policy encouraging risk taking and company formation
Long-term support for University, government R&D Creating entrepreneur friendly
• Legal system (creating law)• Court system (enforcement)
Intellectual property protection Investor friendly, confidence inspiring, securities
regulatory system
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Government Policies Can Be Harmful to VC
Misguided overreaching U.S. government policies, regulations, like Sarbox have harmed domestic VC industry by
• Sharply reducing IPOs• Increasing costs of going public, ongoing compliance
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Beware of Unintended Consequences
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A Tale of Two Markets
5,049
2,525
2000 Peak(3/10/2000)
NASDAQ
4/30/2007
(50%)11,723
13,063
2000 Peak(1/14/2000)
Dow
4/30/2007
+ 11%
There are significant disparities between tech markets and capital markets in general
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Tech IPOs Continue to Decline
# of U.S. VC Backed Tech IPOsAmount Invested ($B) $90B
$80B
$70B
$60B
$50B
$40B
$30B
$20B
$10B
0
105
6046
180
108
10 106 1118 20 17$9.2 $11.2 $12.5
$46.3
$87.7
$36.4
$22.2$19.7 $22.5 $24.0 $26.7
$14.5
Source: VentureSource and National Venture Capital Association MoneyTree™ Report
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Source: Thomson Financial/National Venture Capital Association
M&AIPO
Num
ber o
f Exi
tsM&A Has Become the Primary Venture Exit
Annualized
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Global Private Equity Market
Source: Marketview
More U.S. Companies Have Gone Private but Q3’07 May See a Slowdown
25%
20%
15%
10%
5%
0%
% of U
.S. M&
A Volum
ePr
ivat
e Eq
uity
Vol
ume
($U
SB)
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Weak US Capital Markets Offset by Global Strength
Source: World Federation of Exchanges, 10/23/06
North America4 Exchanges$19.9 TrillionNYSE $14.4TNASDAQ $3.7T
Latin & SouthAmerica7 Exchanges$1.1 Trillion
Middle East &Africa4 Exchanges$0.8 Trillion
Europe18 Exchanges$13.4 TrillionLondon $3.4TEuronext $3.4T Asia-Pacific
17 Exchanges$10.2 Trillion*Tokyo $4.4THong Kong $1.4T
* Osaka & the National Stock Exchange of India are not included in the total for Asia-Pacific to avoid double counting Tokyo & Bombay
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Capitalization of Global Markets
Source: World Federation of Exchanges, 2006
Development of Markets Abroad is Healthy
2005200420032002200120001999199819971996199519941993199219911990
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Tax Policy is an Important LeverCapital gains tax revenue forecast vs actual in billions
Tax
Rev
enue
in B
illio
ns
Source: Treasury Department and Congressional Budget Office
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Bush tax cuts2003
Latest CBO estimates
Individual Long-Term Capital Tax Rates 2005-2006
The rates are based on long-term capital gains tax rates applicable to gains on sales of share.*Long-term capital gains listed securities are exempt. Source: Individual Taxes 2004-2005, Worldwide Summaries (PricewaterhouseCoopers), European Tax Handbook 2005 (International Bureau of Fiscal Documentation) and various government web sites. Confidential & Proprietary25
0%0%0%0%0%0%0%0%0%0%0%0%0%0%
10%12.5%
14.5%15%15%
17.6%19%
20%20%
23.5%25%
26%28%28%
30%32%
43%
Currently
After Lapse (2011)
0%
20%20%
*
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Total U.S. Tort Costs
Source: Towers Perrin, 2006
Cost of Litigation is Growing in the U.S.
300
250
200
150
100
50
0
Tort Costs ($B
)
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
Tort
Cos
ts a
s %
of G
DP
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% of WorldPopulation
4.81
U.S. China
20.35
4.35
U.S. China
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Percentage of World Population
Source: Stocks for the Long Run and Future For Investors, Jeremy J. Siegel
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Percentage of World’s GDP
% of World’sGDP
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U.S. China
1410
U.S. China
19
Source: Stocks for the Long Run and Future For Investors, Jeremy J. Siegel
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Top Markets Where the Cost of Complying With Corporate Governance Regulation is Too High
U.S UK & Ireland
Canada India Austria, Germany,
Liechtenstein, Switzerland
Israel China NordicCountries
France, Italy,
Monaco, Portugal,
Spain
Benelux
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Top Markets Where Regulation is Too Lax and Creates Additional Business Risk
India Central/EasternEurope
China CIS & Russia
LatinAmerica
Other Asia MiddleEast
(excl Israel)
Africa Israel South Korea
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Top Markets Where Intellectual Property Laws Create Additional Financial Risk
China India U.S. Israel OtherAsia
Canada SouthKorea
LatinAmerica
MiddleEast
(excl. Israel)
Central &EasternEurope
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Public Policy Implications for China
Establishment of one industry voice, CVCA, is an important positive step
Creation of the domestic Shenzhen, Shanghai Exchanges also desirable
Caution against overregulation which could discourage new company formation and restrict foreign capital inflows
Importance of strong capital market oversight and governance agencies like CSRC
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Key Messages Summarized
China VC industry today still in very early stage (roughly same as U.S. in late 70’s)
Industry always has been cyclical – new cycle every 10-12 years. Anticipate downturns.
Flourishing VC industry a crucial element for leveraged job creation, innovation, and long-term economic growth
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Key Messages Summarized (cont.)
Public policy plays major role in successful evolution of VC industry
• Taxation, Legal, R&D Support, Governance, Etc. Excessive government intervention has periodically
damaged U.S. VC industry (Sarbox) NVCA in U.S. has played important role in
influencing public policy - I strongly encourage CVCA to do the same in China
Thank You.
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