Peter Moran Perspectives from the Venture World Leaders for Manufacturing Conference

Confidential and Proprietary

Peter MoranPerspectives from the Venture World

Leaders for Manufacturing ConferenceOctober, 23 2003


Thoughts from Venture WorldThoughts from Venture World

Gaining lift off “Wild West” to “Exciting East” LFMs in Start-ups



Gaining lift off – What is Venture Capital– Venture Trends– Reaching Escape Velocity

“Wild West” to “Exciting East” LFMs in Start-ups




“Exciting East” LFMs in Start-ups


Venture Capital as an Asset ClassVenture Capital as an Asset Class

Public stocks Public bonds

Venture Capital Buyout/Mezzanine

Private Equity

Portfolio

Real Estate

Asset Class

Fund of Funds

Family Offices

Advisors

PensionFunds

UniversityEndowments

Corporate Treasury

High WealthIndividuals

BanksInsurance

Companies

Fund Source


“Venture Capital Is …”Depends upon where you stand

Investment Capital Leadership & contacts Economic development Commercializer Innovation engine Job creator Research magnet


Importance of US VC Industry – Big PictureImportance of US VC Industry – Big Picture

Enables innovation (“small companies do it better”) Principal reason for sustained US productivity growth Job, wealth creation platform – standards of living impacts Highest financial returns of any asset category over time –

caveat Major impetus for healthy capital markets Capital gains taxes- a massive contributor to federal, state

government revenues Financial return opportunities attract foreign investment capital


Job Creation by Startups in the USAJob Creation by Startups in the USA

48%< 20 Employees

24%>500 Employees

68%<20 Employees

22%20-499

Employees

10%>500

Employees

Share of Net New JobsShare of Growth in

number of Companies

Major Source of Job Creation from Hi-Tech Start-ups 1990-1995

Source: Small Business Administration from Bureau of Census

28%20-499

Employees


Venture funded firms

12.5 million employees

Annual revenues of $1.1 trillion

Source: DRI-WEFA (analysis as of 8/2001)

Impact of Venture CapitalImpact of Venture Capital

Represent9.7% of US payroll

11% of US GDP6.7% of US co revenue

Confidential and ProprietarySource: DRI-WEFA (analysis as of 8/2001)

Venture Impact, Cont.Venture Impact, Cont.

Venture Investment1970-1999

For $1

For $22K

ImpactIn 2000

$9 in Revenue

1 job


R&D Spending - Top 15 Global IT PlayersR&D Spending - Top 15 Global IT Players

Acquisitions of innovative start-ups substitute for R&D of large companies

Acquisitions of innovative start-ups substitute for R&D of large companies

1991 2002

R&D as % of Market Cap

Source: DCM Research

5%10%R&D as % of Market Cap


Venture by StateVenture by State

California 1,400 Texas 676 Pennsylvania 425 Massachusetts 381 New York 369 Georgia 338 Washington state 264 New Jersey 260

Source: DRI-WEFA 2001 study

Venture Backed Jobs (000s)

*Tennessee 382

California 270 Texas 158 Pennsylvania 58 Massachusetts 49 New York 66 Georgia 63 Washington State 75 New Jersey 38

Venture Backed Revenue ($B)





Confidential

Venture Capital ExplosionVenture Capital Explosion

1% US GDP

Sub 0.2% US GDP

$ M

illi

on

In

vest

ed

Source: PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree™

Commitment to US Venture Capital

Confidential

10,00010,000

1,8001,800

900900

1,5001,500

5,800

($100 BInvestedCapital)

5,800

($100 BInvestedCapital)

CompaniesFunded

CompaniesRemaining

Acquired

TakenPublic

Shut Down

The OverhangThe Overhang

Confidential

Source: VentureOne/Ernst & Young

1996

2003 Investment Continues to Fall2003 Investment Continues to Fall

1997 1998 1999 2000 2001 2002 1H03

Am

ou

nt

Inve

sted

($B

)

$0

$25

$50

$75

$100

0

1,000

2,000

3,000

4,000

5,000

6,000

Nu

mb

er of D

eals

866

2156

3112

4502

25202198

1901

Deal Flow and Equity into Venture-Backed Companies (Annual)

$9.9 $13.1$17.8

$49.2

$93.9

$35.4

$20.3

$7.5

Amount Invested ($B) Number of Deals


Amount Invested $M

VC Funding Bottoms?VC Funding Bottoms?

Source: VentureSource

2001 2002 2003Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

1st Growth in 6 Quarters

2001 2002 2003Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

# of Financing Rounds


Source: VentureOne

1993 1997 1998 1999 2000 2001 2002 1H03$0

$15

$20

$25

$8.5

Median Premoney Valuation by Year

Valuations at Mid-’90s LevelsValuations at Mid-’90s LevelsM

edia

n P

rem

on

ey V

alu

atio

n (

$M)

$30

$10

$5

199619951994

$10.7 $9.5$11.2

$12.6$15.5

$22.0

$26.0

$16.8

$10.5 $10.0


Equity Investment by Industry SectorEquity Investment by Industry Sector

0%

20%

40%

60%

80%

100%

2Q00 4Q00 2Q01 4Q01 2Q02 4Q02 2Q03

Products &Services

InformationTechnology

Healthcare

% o

f In

vest

men

t

Source: VentureOne/Ernst & Young


Source: VentureOne

Am

ou

nt

Pai

d (

$B)

$0 0

25

50

75

100

125 Nu

mb

er of T

ransactio

ns

125

$45.7

$23.8

$11.8

Amount Paid ($B) Number of Transactions

M&A Opportunities Stable in 2Q’03M&A Opportunities Stable in 2Q’03

Transactions and Amount Paid in M&As

$30

$40

$50

$20

$10

1Q00 3Q002Q00 4Q00 2Q011Q01 3Q01 1Q024Q01 2Q02 4Q023Q02 2Q031Q03

$20.3

$7.5 $5.6 $4.9 $3.5 $1.9 $2.7 $3.2 $2.7 $2.3 $2.7

110116

103 104 10395 92 87

109

8683

6763


Median Raised in Private Rounds ($M)

Source: VentureOne

$0 0

5

10

15

20

5.55.5$18.2$18.2

Median Amount Paid ($M)

$60

$80

$100

$40

$20

Not Much Profit in Current M&AsNot Much Profit in Current M&As

Median Amount Paid in M&As vs. Median Investedin Private Rounds Prior to M&A

Med

ian

Am

ou

nt

Pai

d (

$M)M

edian

Invested

in

Private R

ou

nd

s ($M)

1997 1998 1999 2000 2001 2002 1H031996

$19.7$19.7$26$26$100$100$55.2$55.2$31.1$31.1$34.3$34.3$40$40

5.75.77.07.0

11.311.3

10.410.4

14.714.7 15.415.4

21.021.0


Source: VentureOne

Am

ou

nt

Rai

sed

($B

)

$0 0

20

40

60

Ven

ture-B

acked IP

Os

7070

$7.6

$3.5

$1.5

Amount Raised ($B) Venture-Backed IPOs

$10

$5

1Q00 3Q002Q00 4Q00 2Q011Q01 3Q01 1Q024Q01 2Q02 4Q023Q02 2Q031Q03

$6.7

$.5 $.3 $.2$.8 $.3 $.9 $.03 $.4

$0.00$.2

IPO Liquidity Remains Rare IPO Liquidity Remains Rare

Deals and Amount Raised Through IPOs

7171

4343

1818

55 44 44 88 44 9911 66

0022


Nikkei at 19-Year LowNikkei at 19-Year Low

2003 11,025

19

Confidential

Equity Returns Annual Returns, PercentEquity Returns Annual Returns, Percent

As of 6/30/03Source: Thomson Venture Economics/NVCA

Early/Seed VC

All Venture

All Private Equity

NASDAQ

S&P 500

1 Year 5 Years 20 Years

-26.1 47.9 19.8

-27.4

-6.9

10.8

-1.5 -3.0

-3.1

6.1

24.2 16.1

13.8

12.7

11.6





Confidential

Beating the Net Startup OddsBeating the Net Startup Odds

Totals from 1994 through first-quarter 2000Source: Estimates from The Standard based on data from VentureOne, Garage.com, primary research and venture capital firms

Went Public/Acquired

Received Venture Capital

Received Other Financing

Business Plans Shopped

1 in 833 business plans made it big

1 in 173 receive VC funding

2 in 10 ideas become business plans

Entrepreneurs with a big ideaEntrepreneurs with a big idea2.25 Million2.25 Million

500,000500,000

5-15,0005-15,000

3-5,0003-5,000

605605


Early Stage Venture Investing Life Cycle Early Stage Venture Investing Life Cycle

Find great entrepreneur team Identify rapidly growing market Build product with unique, defensible technology Implementing barriers-to-entry, differentiation Complement, expand management team Establishing global sales, distribution capability Achieve profitable steady state business model Liquidity event (IPO or M&A)

Systematic, Long-Term Process ofRisk Reduction through each Phase


Sometimes We Dismiss Great Tech OpportunitiesSometimes We Dismiss Great Tech Opportunities

“The ‘telephone’ has too many shortcomings to be seriously considered a means of communication”

– Western Union Internal Memo, 1876

The wireless music box has no imaginable commercial value. Who would pay for a message sent to nobody in particular?”

– David Sarnoff’s associates in response to his urging for investment in Radio in the 1920’s

“Who the hell wants to hear actors talk?”– Harry M. Warner, Warner Bros, 1927

There is no reason for any individuals to have a computer in their home.”– Ken Olsen, President, Chairman & Founder of DEC, 1977

“Heavier-than-air flying machines are impossible”– Lord Kelven, President, Royal Society 1895

“Airplanes are interesting toys but of no military value.”– Marshall Ferdinad Foch, Professor of Strategy, Ecole Superiure de Gueere


VC MindsetVC Mindset

“Venture capitalists make lemmings look like rugged individualists.”

– Mark F. Radcliffe, Gray Cary Ware & Freidenrich


VC Mindset VC Mindset





Confidential

A New Alarm BellA New Alarm Bell

U.S. Manufacturing Jobs Millions

2.7 million jobs lost in 3 years,

includes 400,000In High-Tech

… And It’s Not JustManufacturing Jobs!


Emergence of “Exciting East”Emergence of “Exciting East”

Shanghai 2003Shanghai 1980s


U.S. is Not Center of UniverseU.S. is Not Center of Universe

“Think Outside The Box”

Confidential and ProprietaryConfidential and Proprietary

2002

All Others

Western Europe

Asia (includes Japan)

USA

2007

34%34%

27%27%

27%27%

12%12%

Total $156B Total $166B

25%25%

34%34%

25%25%

16%16%

International: PC & Workstation MarketInternational: PC & Workstation Market

Source: IDC


International: Network EquipmentInternational: Network Equipment

2003 2004 2005 2006 2007

Spending Growth Rates

25%

-5%

0%

5%

10%

15%

20%

USA

Asia Pacific(ex-Japan)

-2%

2%3%

9% 9% 9%11%

19%21%

18%

Source: IDC


China Telecom Capex as % of US

China Telecom SpendingChina Telecom Spending

20%

Source: CSFB, MIT

28%

37%

46%

2000 2001 2002 2003

US Capex

China Capex

$136

$ 27

$119

$ 33

$68

$25

$54

$25


China Communications OpportunityChina Communications Opportunity

Fastest growing telecom infrastructure CapEx

–14% wireline penetration

Fastest growing & largest wireless market

–190M subscribers 150M+ white collar

workers

–Rapid growth to 300M

Facts

WTO Beijing Olympics Break-up of China

Telecom Leapfrog deployments

–VoIP–Metro Ethernet–BB wireless

Local VCs emerging

Enablers

SelectiveOpportunitiesfor VentureInvestment

SelectiveOpportunitiesfor VentureInvestment


Technology Companies with Significant Asian RevenueTechnology Companies with Significant Asian Revenue

Companies With Primary Listing in U.S.(US $MM)

Company Market Value as of Apr. 23, 2002

UTStarcomNeatease.comSina.comSohu.comChinadotcomAsiaInfoASAT HoldingsRediffGigamediaPacific InternetKareo Thrunet

$ 2,332327339

245470212

175023

68

Market Value as of Sept. 18,2003

$ 3730 2020 1950 1460 1010 375 284 155 110 107 N/A

% Change

60%6213% 2571%3644% 312% -20% 34% 811% 120%365%

N/A


Cost To Build a Semi CompanyCost To Build a Semi Company

US/Silicon Valley

China

Science/ Engineering

Grads

Avg. WageSemiconductor

Designer

Total investment to

build semi co. to cash flow

positive

480,000 465,000

$120k/yr $11-14k/yr

$35-45M $15-22M


New Company Formation – Necessary ConditionsNew Company Formation – Necessary Conditions

Morgan Stanley Dean Witter & Co.

1980 – 2000 1995 Large home markets Great technology companies World-class universities New ideas / new industries Intellectual property rights Effective patent laws Entrepreneurs Icons Low capital gains tax Venture capital funding M&A market for new technology companies Easy access to big IPO market

YesYesYes

ComingNoYes

Yes++Coming

YesYesNoNo

2000

YesNoYesNoNoYesYesNoNo

StartingNoNo

USA PRC


Summary of Common Investment Hypotheses for ChinaSummary of Common Investment Hypotheses for China

Technology Localization

Political Risks

Only 300-400 million Only 300-400 million addressable marketaddressable market

Technology Innovation

Legal / Fin.Structures

MarketSize

Chinese Partners and Chinese Partners and customers are increasing customers are increasing

acceptance of foreign acceptance of foreign brands and goods brands and goods

Several key Several key technologies are being technologies are being deployed first in Chinadeployed first in China

Have succumbed to Have succumbed to partnering route to partnering route to

market in select casesmarket in select cases

Billions, billions Billions, billions everywhereeverywhere

Local distribution and Local distribution and local functionality are local functionality are necessary for entrynecessary for entry

Burdens of size stifle Burdens of size stifle innovation or early innovation or early adoption in Chinaadoption in China

The Party will not let The Party will not let anybody else in to the anybody else in to the

countrycountry

The legal system is The legal system is terrible and structures terrible and structures are unstable at bestare unstable at best

Some of the unstable Some of the unstable structures are working. structures are working. Genuine commitment.Genuine commitment.

The bottom impose The bottom impose a heavy taxa heavy tax

The Urban Myth is still The Urban Myth is still largely TRUElargely TRUE

Get the right Get the right technologies / all the technologies / all the other risks still applyother risks still apply

Will pretend to want to Will pretend to want to partner and will end up partner and will end up building – a la MSFTbuilding – a la MSFT

Is still weaker than Is still weaker than more developed more developed

countries.countries.

Urban Myth Truth Caution


Silicon Valley VC Concerns Over Investing in ChinaSilicon Valley VC Concerns Over Investing in China Critical shortages of experienced management Technology uniqueness & defensibility Legal protectability of intellectual property Venture friendly legal system, regulatory infrastructure Unnecessary company formation complexity Corporate governance, compliance, transparency Inadequate international stock exchanges, listing

requirements, currency constraints (exit constraints) Political, country risk Shareholder rights issues (e.g. CNC) Ever changing, conflicting government mandates and their

impact on startups


Political Risk - SummaryPolitical Risk - Summary

Source: The Economist


Case Study: SMIC – Semiconductor FabCase Study: SMIC – Semiconductor Fab

Founded – 1999 Raised – $ 1.5 Billion Investors – Walden International, Temasek,

Vertex, New Enterprise Associates (NEA), Oak Investment Partners, Goldman Sachs, DCM

Production started – 2002 Will pass Charter Semiconductor as worldwide #4

foundry in Q4 2003 On track for $ 1 Billion revenue in 2004

Confidential

Shortage:528K 8” wafersper month

Shortage:528K 8” wafersper month

Domestic IC supply shortage is expected to be doubled by 2006Domestic IC supply shortage is expected to be doubled by 2006

Source: Dataquest (2002), CSFB Estimates

2000

Domestic IC Supply Lags Far Behind DemandDomestic IC Supply Lags Far Behind Demand

2001 2002 2003 2004

Shortage:1,087K 8” wafers per month – approx. the capacity of 30 8” fabs or 12 12” fabs

Shortage:1,087K 8” wafers per month – approx. the capacity of 30 8” fabs or 12 12” fabs

0

200

400

600

800

1,000

1,200

1,400

1,600

# o

f 8"

Waf

ers

per

Mo

nth

('0

00)

SupplyDemand

’02-’06 Wafer Demand CAGR: 24.5%

Confidential

Record Fab Ramp UpRecord Fab Ramp Up

33

Source: JPMorgan estimates, company reportsNote: SMIC’s wafers are 8”, TSMC’s wafers were 6”, UMC’s wafers were 4”

1980-1987

SMIC TSMC UMC

55

77

1987-19922000-2003

# of Years to Reach Capacity of 45,000 Wafers/Month

33

1980-1993

SMIC TSMC UMC

66

1313

1987-19932000-2003

# of Years to Reach US $300M Revenues

Reach Critical Scale in Just 3 Years

2000 2001 2002April May June Sept.

15 Months

SMICIncorporated

Construction of Fab 1 begins

Fab 1 begins production


Good ReadingGood Reading






Know Your GoalsKnow Your Goals

Fortune Fame Family Fervor Friends


FortuneFortune


Know Your AudienceKnow Your Audience

What VCs Look For– People– Big outcome potential– Sustainable, competitive advantages– Ability to attract future financing

Remember – Fear & Greed


GreedGreed


Entrepreneur Fundraising IssuesEntrepreneur Fundraising Issues

What are VCs expectations? Can you meet them? Raising $ - a sales situation!! Valuation negotiation strategy Succinct, compelling, realistic bizplan Management team, advisor pedigrees Due diligence your target VCs


Manufacturing Matters– Domain expertise: Optiant, ECnet, I2– Functional Expertise: Procket, Layer 7

Marketing, Sales & Engineering often Matter More Expertise & Experience Matter Most

LFM Careers in Start-UpsLFM Careers in Start-Ups


Fortune . . . Fortune . . .

- William Shakespeare

“Fortune always will confer an aura,Of worth, unworthily; and in this worldThe lucky person passes for genius”

“Fortune brings in some boats that are not steered”- William Shakespeare

DCM OverviewDCM Overview

Founded in 1996 to invest in early-stage communications & Internet infrastructure, application software/service, and end-user content/service opportunities.

Experienced partners from Accel, Apple, Arrow Electronics, Bain, Cisco, Hewlett-Packard, IBM, Intuit, KPMG, New Era of Networks (NEON), McKinsey, Silicon Graphics, and Sun Microsystems.VINTAGE Committed NUMBER OF

YEAR FUND Capital INVESTMENTS

1996/7 DCM I $51M 18

1999 DCM II $155M 20

2000 DCM III $471M 28

Confidential

DCM OverviewDCM Overview

Early-stage communications, software, and services investments Experienced team from: Accel, Apple, Arrow Electronics, Bain,

Cisco, F5, Goldman Sachs, HP, IBJ, IBM, Intuit, KPMG, NEON, McKinsey, Silicon Graphics, Sun Microsystems, and USWest.

DCM Partners Track RecordDCM Partners Track Record

Public:

Private/Acquired:

DCM Investment ProfileDCM Investment Profile

75% early-stage companies, 25% strategic late-stageMajority of early stage deals are seed stage

Typically lead or co-lead investorTaking a Board of Directors seat in 80% or more of the deals

Total investment in any one deal generally up to $15MTypical initial investment $3-$6M; reserves of 125-150% for early stage deals

Seed round investments as low as $0.5M

Active EIR programs feed into seed stage deals

Peter MoranLeaders for Manufacturing Conference

October, 23 2003

Documents

Peter Moran Perspectives from the Venture World Leaders for Manufacturing Conference