ScaleVP Marketview Dec2008

1ConfidentialCopyright 2008 Scale Venture Partners

VC Market Update for Entrepreneurs

December 2, 2008


Agenda

Investment Outlook – Impact of Recession

Deployment of Dollars in 2009 – Where & How?

Exit Environment

Long Term Outlook

Scale Venture Partners


Investment Outlook


Context for Current Economy

2000: Tech Bubble: Silicon Valley Exported Its Irrational Exuberance to Wall Street

– Near Term Results: NASDAQ Down 80%

– Long Term Impact: Less Venture Dollars, Each Company More Cash Efficient

2008: Wall Street Sent Its Credit Squeeze to the World:– Near Term Results: NASDAQ Down 40%

– Spiraling into Global Recession

– Long Term Impact: TBD


VC Market Environment More Rational Than 2000

20002000

$104 BN Raised 264 IPO’s – Most Unprofitable 7903 VC Investments Nasdaq Peak: 5048 Nasdaq PE at Peak 64+ Nasdaq Peak to Trough:

Down 80%

20072007

$35 BN Raised 86 IPO’s - Most Profitable 3931 VC Investments Nasdaq Peak: 2859 Nasdaq PE at Peak 22 Nasdaq Peak to Current:

Down 50%


Economic Contagion More Dangerous Today

20002000

S&P Peak to Trough – 50% Worst Sector - Technology No Real Systemic Risk 9/11 External Threat Drove

Second Leg Result “Typical” Post War GDP

Decline: Sub 2%

20072007

S&P to Date Down 42% Worst Sector - Financials Clear Systemic Risk Subprime First Leg De-leveraging Second Leg Global Recession Third Leg Range of Outcomes from Tough

Recession to GD II 1929-1933 GDP down 30%

A More Rational Venture Environment will Confront a More Virulent Recession


Risks In Today’s Economy

Venture-backed Company Execution– Execution, Clinical, Product Risks

Impact of Economy on Revenue Growth – Hardest on “GDP Dependent” Businesses

Financing Risk– Much Harder Today to Raise Money

Valuation Risk– Will the Market Reward Companies with Appropriate Returns?

– Eventually Risk Will Resolve Itself

• Strong Fundamentals Get Rewarded

• Investors Ultimately Looking for Return

All Risks Except the First are Impacted by the Economy

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Resistant: Open Source, Virtualization, Low Cost Recurring

Revenue Models

Business Exposure to Changes in GDP

Immune: Cure Cancer , Cost Saving Non-Elective HC Services

Exposed: Consumer Products, Brand Advertising, Elective

Surgery


Financing Risk

See Sequoia Slides… http://tinyurl.com/3erkjz

Better Since 2000 – Industry Burnt Once…– Leaner Burn Rate Overall

– Bootstrapped Companies Use Venture to Scale Final Commercial Phase

– “Just-in-time” Expense Build Up For Growth

Pockets of risk – Reduced Pools of Equity Capital as VC’s Tend Existing Portfolio

– Series B Without Traction

– Syndicate Weakness

– Assume Fewer Strategic Investors/Partners

– Clean Tech Cap Ex Projects

– Limited Debt Sources


Deployment of Dollars in 2009Where? How?

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Bulk of Dollars Into Expansion & Later Stage DealsInvestments By Stage – Q3 2008

$1.2 $1.1 $1.1 $1.2 $1.4 $1.3$1.8 $1.5

$2.0 $1.7 $1.8 $1.7

$2.3

$2.6 $3.1$3.1 $3.3

$2.6 $2.7

$1.6

$2.4$3.1$3.0$3.3$2.6

$1.7

$2.8$3.3

$2.8$3.0$3.2

$3.2$3.1

$2.1$2.4$2.5

$2.8

$3.0 $2.3

$0

$1

$2

$3

$4

$5

$6

$7

$8

Q3'05 Q4'05 Q1'06 Q2'06 Q3' 06 Q4 '06 Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Q3'08

Seed/Early Stage Expansion Later Stage

38%

39%

23%

Last Four Quarters

Total Amount Invested ($B)

PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ ReportBased on Data from Thomson Reuters

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…But Early Stage Companies Being FundedQ3 2005 – Q3 2008


272 256 271 307 329 306420

357 382 362 378 350

294

333312

347329 321

263

375

241327

360 339286

307

258276

274

278 236224

271

309314

320299 334

294

Q3'05 Q4'05 Q1'06 Q2'06 Q3' 06 Q4 '06 Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Q3'08

Seed/Early Stage Expansion Later Stage

Number of investments by stage

13Confidential

IT

LS

$73$120

$178$323$396$403

$1,343

Software IT Services Semiconductors Telecom Networking &Equipment

Electronics &Instrumentation

Computers &Peripherals

$56

$896

$1,350

Biotechnology Medical Devices andEquipment

Healthcare Services

$2,835.7 Mil

$2,301.9 Mil

IT Investments ($M)

Life Sciences Investments ($M)

Software, Biotech, Medical Devices Dominate Investments By Industry – Q3 2008

PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ ReportBased on data from Thomson Financial


$245

$470$578

$886$708

$1,172

$887$1,036

$508$377$289

$123$112

Q3'05 Q4'05 Q1'06 Q2 '06 Q3 '06 Q4 '06 Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Q3'08

0

10

2030

40

50

6070

$ Invested # of deals

Clean Tech Investment Remains Strong Q3 2005 – Q3 2008


Clean Tech Investments ($M)

$1,088$1,226

$1,061$1,256

$1,401 $1,352

$1,644

$1,057$1,182

$998$1,002$836$763

Q3'05 Q4'05 Q1'06 Q2 '06 Q3 '06 Q4 '06 Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Q3'08

0

50

100

150

200

250

300

$ Invested # of deals

Internet-Specific Investments ($M)


Less Investment – Better Risk/Reward Balance

VC’s Will Have Less Money to Spend– More Allocated to Reserves

Stage? Sectors? It Will Go into Risk Reduced Deals – Lower Exposure to GDP

– Lower Burn Rate

Valuations - Who is Right?– Public Values Adjust Quickly – Over React?

– Private Values Lag – Under React?

– Prices Still Appear High Today, Particularly with Little 2009 Visibility

Returns– Public Markets Have Ceded 2 Years of the Growth Cycle Back to Venture Investors

– Winnowing out Occurs in Private vs. Public Markets

– Result is Few, Bigger IPO’s with Better Metrics and Fewer Competitors


Exit Environment

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Venture Exit Counts - IPOs and M&A by Year

0

100

200

300

400

500

600

700

Year

Number of Issues

M&A

IPO

M&A 17 76 74 100 98 118 172 221 248 327 388 341 299 351 371 387 361 220

IPO 156 181 220 166 202 270 136 77 260 264 41 22 29 93 57 57 86 6

91 92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05 '06 '07'08 9

mo

Source: Thomson Reuters & NVCA


IPO Exit Environment – Market Feedback

86 IPO’s in 2007 – High Water Mark until 2010– But 2010 is Expected to be Stronger than 2007

To Resume, Will Need:– Multiples to Expand

– Volatility to Decrease

– Earnings Visibility to Increase

– 1- 3 Quarters of Cash Flow Positive Operations

M&A– Will Face Pressure

– Accretive Transactions Still Getting Done

Banker Quotes:– “Harsh Winter Is Good As Leaves More Room for Winners to Survive”

– “Fortunes Will Be Made in Next 12 Months…by Buying Not Selling”


Long Term Outlook


Venture Backed Companies Lead the Economy

Tech & Healthcare Companies

Amgen

Apple

Boston Scientific

Cisco

Genentech

Genzyme

Google

Intel

Microsoft

Oracle

Tech Sector is 18% of S&P

Healthcare is 14.3% of S&P

Venture Backed Companies Represent 18% of US GDP

Job Growth 2-1/2x the Market


What Does History Tell Us? IBM During Great Depression

Mid 1980’s and Late 1990’s Tech Bubbles– When Venture Fundraising Declines, Returns Increase

– True in Mid 1980’s & History Repeated Itself in the Mid 1990’s

– Best Companies Were Built During Troughs: Microsoft, Cisco, Google

Today– Venture Funding on Secular Decline

– If History Repeats Itself, Good Time to Invest

0

50

100

150

200

250

300

350

0

10

20

30

40

50

60

70

IBM Annual Revenue ($M)

GDP ($B)


Venture Capital Summary

Venture Is Not Dead

Innovation Expected to Lead US Economy Out of Recession

However…Venture Is Not Immune to Current Economy

Therefore…It Will Require More Time & Money Per Company to Exit– Higher Failure Rates

– Winners Will Do Better - Healthier Companies with Fewer Competitors

– Fund Returns May Be at Strong Multiple

Venture Contraction Will Continue…& Leave Survivors Healthier– Short Term Dislocation

– Continuous Since 2000

– Benefit to Industry Overall


“don't forget that surviving is not winning, and winning requires more than cutting.”

“don't forget that surviving is not winning, and winning requires more than cutting.”

A Letter to Venture-Backed CEOs




About Scale Venture Partners

Formed in 2000

Invest in Technology & Healthcare

Invest Throughout U.S. – 50% ex-Silicon Valley

Since Fund Formed:– 33 M&A Exits– 11 IPO’s– 4 Exits in 2008

Proactive, Theme-based Investment Strategy

Partners Have Worked Together > 10 Years–Significant Operating Experience in Investment Sectors

www.scalevp.com


We Invest Early in a Company’s Evolution butAfter experimentation Is Over …

We Invest Early in a Company’s Evolution butAfter experimentation Is Over …

The Benefits:

Proprietary Deal Sourcing Over 40% of Deals Series A 17% Average Ownership 1st/2nd Largest Investor

ScaleVP:

Investing in the Middle of the Risk-Reward Continuum

Reduced Risk Faster Time to Exit Significant Ownership Ability to Add Value

EarlyEarly

Higher Risk / Higher Return

LateLate

Lower Risk / Lower Return

ScaleVPScaleVP

Financial Data as of 9/30/08


Consistent Track Record of QualityExits Has Built Reputation and Network

2000 2002 2004 2006 2008

Over $8.6B in Value Created in 33 Exits in 8 Years (11 IPOs)

Financial Data as of 9/30/08 pro forma

Financial Data as of 9/30/08


Rank Firm# of Deals >$200M

Value Created($Ms)

1 KPCB 9 $185,067

2 Sequoia Capital 12 $184,597

3 TA 6 $12,424

4 Accel 12 $11,547

5 Battery Ventures 9 $10,210

6 NEA 16 $8,853

7Madison Dearborn

3 $7,776

8 Benchmark 12 $7,212

9 Warburg 6 $6,512

10 Domain 16 $6,278

11 Venrock 9 $4,003

12 Menlo Ventures 8 $3,893

13 JP Morgan 5 $3,785

ScaleVP Among Top Venture Firms for Exits

Source: Venture Source for US Venture Capital Exits 2003 to 2007. Includes all exits > $200M at time of IPO or M&A. Credit given to board member investors only. Ranked by most recent market capitalization on 5/21/2008.

Rank Firm# of Deals >$200M

Value Created($Ms)

14 DFJ 3 $3,770

15 Foundation 6 $3,751

16 Apax 6 $3,734

17 Greylock 7 $3,670

18 ScaleVP 8 $3,626

19 Charles River 6 $3,567

20 Versant 10 $3,565

21 Vertical Group 1 $3,562

22 TCV 8 $3,534

23 Globespan 4 $3,533

24 Sprout 6 $3,484

25 August Capital 4 $3,479

All Deals Post-Bubble2003-2007



Contact:Scale Venture Partners

950 Tower Lane, Suite 700

Foster City, CA 94404

phone: (650) 378-6000

fax: (650) 378-6040

Email:[email protected]

Web:www.scalevp.com