Venture World 2005
Michael Danaher
Wilson Sonsini Goodrich & Rosati
October 2005
2
Venture World – 2000
IT’S A MAD MAD MAD MAD WORLD
3
Venture World – 2002
WATERWORLDBudget = $175,000,000 • Box Office = $88,246,220
4
Venture World – 2005
MASTER AND COMMANDER: THE FAR SIDE OF THE WORLD
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1. The Nasdaq Force Field Continues
2. Valuation Trends
3. Deal Terms
4. Exit Strategies
5. Tilting Towards Asia
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1. The Nasdaq Force Field Continues
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The Nasdaq Force Field Continues FUND INFLOWS
Source: Bloomberg, Nasdaq 1994-2005
$9.4
$17.8
$9.2$13.1
$50.5
$82.8
$58.8
$26.9
$17.1$12.7
$7.0$5.4
$0
$20
$40
$60
$80
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1H05
* Annual projectionSource: “Venture Capital Industry Overview,” VentureSource, October 2005
Fun
ds R
aise
d ($
B)
$18.8*
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2005 Fund Formation
Roman Numeral Funds Dominate
• Accidental result of year 2000 venture market
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2005 Fund Formation
Increased Focus on China and India
• More geographic funds
• More talk about Asian strategies
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So Goes Nasdaq... FUND OUTFLOWS
Source: Bloomberg, Nasdaq 1992-2005
$6.4$9.2
$13.1$17.9
$49.5
$94.6
$36.2
$22.0$19.2
$21.5
$16.2
3257
222621442375
6310
4591
25472211
1912
1315
$0
$25
$50
$75
$100
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 YTD05*
0
1000
2000
3000
4000
5000
6000
7000
* YTD05 = 1Q05-3Q05 ** Annual projectionSource: “Venture Capital Industry Overview,” VentureSource, October 2005
$21.6**Am
ount
Inve
sted
($B
)
Num
ber of Deals
1605
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So Goes Nasdaq... LIQUIDITY EVENTS
Source: Bloomberg, Nasdaq 1992-2005
Source: “Venture Capital Industry Overview,” VentureOne, October 2005
$15.1
$34.7
$17.3 $18.5
$62.6
$23.6
$12.4 $14.4
$28.3$22.5
$117.3
413
554
471
359400424
352 321306
660
$0
$20
$40
$60
$80
$100
$120
$140
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 YTD05*
0
100
200
300
400
500
600
700
Am
ont P
aid
($B
)N
umber of T
ransactions
$30.0**
* YTD05 = 1Q05-3Q05 ** Annual projection
284
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For Venture Funds, It’s Still a “Hits” Business
THE BLAIR WITCH PROJECT
Budget = $60,000
Box Office = over $150 million
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2. Valuation Trends
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Median Pre-money Valuations by Round
Source: “Venture Capital Industry Overview,” VentureOne, October 2005
$29
$25
$14$13
$5$6
$3$3
$0
$10
$20
$30
$40
2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05
Later Stage Second Round First Round Seed Round
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WS Investments
Percentage of Series A Deals Increased—But Valuations Did Not
2001 2002 2003 2004 1H2005
15% 36% 31.3% 34.2% 46.3%
Series A Deals as a Percent of Total
Source: WS Investment Data, October 2005
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WS Investments
Quarter
Average Pre-Money Value of Top 10 Deals
($m)
Average Pre-Money Value of Top 3 Deals
($m)
Q104 $63 $96
Q204 $46 $71
Q304 $44 $73
Q404 $76 $101
Q105 $85 $179
Q205 $50 $85
Q305 $82 $145
Source: WS Investment Data, October 2005
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WSGR Venture Financing
Up Rounds Are Up
Source: WSGR Transaction Data, October 2005
Price Change Q1 04 Q2 04 Q3 04 Q4 04
Q1-Q4 2004 Q1 05 Q2 05 Q3 05
Q1-Q3 2005
Up 59% 64% 54% 61% 59% 70% 69% 63% 68%
Flat 11% 12% 15% 14% 13% 11% 8% 19% 12%
Down 30% 24% 31% 25% 27% 19% 23% 19% 20%
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3. Deal Terms
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Deal Terms
Plain Vanilla Is In
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Deal Terms
Liquidation Preference
Senior to last round 56%
Participating preferred• w/ cap
69%
35%
More than 1x 11%
Source: WSGR Transaction Data, October 2005
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Deal Terms
Source: WSGR Transaction Data, October 2005
Anti-Dilution RightsWeighted average 93%
Ratchet 4%
None 2%
Pay-to-Play 15%
Cumulative Dividends 9%
Redemption Rights 30%
(9% in 2004)
(13% in 2004)
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Deal Terms
New Trend?
• Partial Founder cash-outs in later stage deals
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4. Exit Strategies
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IPOs still Down
0% 20% 40% 60% 80% 100%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
YTD05*
IPOs M&As
Source: “Venture Capital Industry Overview,” VentureOne, October 2005
* YTD05 = Q105 – Q305
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Who’s Killing the IPOs?
Multiple Theories
• The SEC and the accountants?
• Higher perceived liability risk?
• Higher certainty of M&A exits?
• Investor impatience?
• Reduced market receptivity to young companies?
• Reduced supply of candidates?
• The butler?
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Reckless Prediction #1
IPO Rates to Double in 1-2 years
• Capital markets will want high-growth companies
• Lots of good companies being built
• Regulatory and accounting costs will be reined in
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Reckless Prediction #2
The “Build to Sell” Business Model Will Become More Common
• e.g.
– Spin-in’s
– “Bio wells”
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Is Cisco Marxist?
John Chambers Karl Marx
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5. Tilting Towards Asia
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Venture Investment in Asia
Intel
• 600 venture deals
• 300 in China
WSGR
• Approaching nearly 2 financings per week in China
• Approaching nearly 1 financing per week in India
India
• 5 years behind China
• Venture financings: $884 million in 2003, $1.3 billion in 2004