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© 2001 Massachusetts Institute of Technology
“NextGen VCs – After the Storm”
PolyTechnos Venture-Partners GmbH
Third Annual Meeting “CEO Day” Berlin
06 November 2001
Kenneth P. Morse, Senior Lecturerand Managing Director
MIT Entrepreneurship Center
2© 2001 Massachusetts Institute of Technology
Desired Outcomes of this Presentation
Provide a basis for a stimulating discussion
Respond to your questions
End on time, so we can enjoy our luncheon (and networking).
I want to express special thanks to
Jesse Reyes, Venture Economics andJohn Taylor, NVCA
for their permission to use their excellent data, analysis, and presentations from VentureXpert™, the Venture Capital Institute, and the DRI-WEFA study which were just released in the USA.
3© 2001 Massachusetts Institute of Technology
1. Our Mission & Focus
2. Past Business and Venture Cycles
3. Current Scene: Trends in Start-ups and VC
4. Future Outlook
Proposed Outline
4© 2001 Massachusetts Institute of Technology
MIT Entrepreneurship Center MissionTo train and develop leaders who will make high tech ventures successful
MIT President Charles M. Vest, July 1996
“I want you to be the premier global center for entrepreneurship, and to be recognized as such.”
“We must not only be the best. We must also serve as a model for others and ensure that, together, we all make a significant global impact in this vital field.”
5© 2001 Massachusetts Institute of Technology
Why Focus on High Tech?
Continuous creation of new, technology-based enterprises enables great leaps forward.
Rising living standards underpin democracy.
At MIT, we believe our distinctive competence is forging innovations in Science, Engineering, & Management to achieve revolutions, not evolution.
6© 2001 Massachusetts Institute of Technology
To Compete Successfully…
University of Cambridge (UK)
The Cambridge Network
CEC
Ireland (3 universities)
Taiwan (3 universities)
Germany?
“MIT startups must attack global markets.”
To teach global high tech entrepreneurship effectively, we need a network of partners:
7© 2001 Massachusetts Institute of Technology
1. Our Mission & Focus
2. Past Business and Venture Cycles
3. Current Scene: Trends in Start-ups and VC
4. Future Outlook
Proposed Outline
8© 2001 Massachusetts Institute of Technology
The Inevitable Business Cycle
“In times of great commercial prosperity there has been a tendency [toward] over-speculation on several occasions. The success of one project generally produces others of a similar kind. Popular imitativeness will … drag a community too anxious for profits into an abyss …”
- Charles Mackay, 1841
9© 2001 Massachusetts Institute of Technology
The Impact of US Venture Capital
Venture firms now account for: 7.9 million employees Annual revenues of $1.56 trillion,
These figures represent: 6.1% of US payroll 14.0% of US GDP 7.9% of US company revenue.
DRI-WEFA Study – Commissioned by NVCA:
Source: DRI-WEFA (analysis as of 8/2001)
10© 2001 Massachusetts Institute of Technology
Key Findings - Preliminary
For every dollar invested in 1970-1999, there was $9 in revenue during 2000
For every $21,627 of venture capital investment in 1970-1999, there was one more job in the year 2000
Not bad for an industry which was:<1.0% in 1970-1995 2.1% in past 5 years
Source: DRI-WEFA (analysis as of 8/2001)
11© 2001 Massachusetts Institute of Technology
The VC Industry has Grown Dramatically in the Past Few Years
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$ M
illi
on I
nve
sted
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Source: VentureXpert™ Database by VE & NVCA
12© 2001 Massachusetts Institute of Technology
Venture Capital Fundraising Continues at a Strong Pace
Source: VentureXpert™ Database by VE & NVCA
$0
$20
$40
$60
$80
$100
$120
$B Raised 8 10 12 18 30 60 105 26
1994 1995 1996 1997 1998 1999 2000 1H01
This does not include money available for investment by Corporate Venture groups.
13© 2001 Massachusetts Institute of Technology
The US Venture Industry Has Grown
Year # Venture Firms
Capital Under Mgt
1980 87 $3B
1990 375 $32B
2000 693 $210B
Source: 2000 NVCA Yearbook
14© 2001 Massachusetts Institute of Technology
How Big is Big in a Venture Fund?Have VCs Abandoned Seed?
2000 Funds by Size:$0-$25M 100$25.1M-50M 80$50.1M-$250M 213$250.1M+ 106
0%
20%
40%
60%
80%
Pct of Money Going to Funds $250M & Up
1995 1996 19971998 1999 2000
Source: VentureXpert™ Database by VE & NVCA
15© 2001 Massachusetts Institute of Technology
Corporate Venture Capital Groups Have Become Very Involved
Source: VentureXpert™ Database by VE & NVCA
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
$18.00
$ Billion $0.28 $0.53 $1.00 $1.90 $10.62 $17.12 $3.19
1995 1996 1997 1998 1999 2000 1H2001
16© 2001 Massachusetts Institute of Technology
Corporate VC Groups are Involved in more than ¼ of all Deals
Source: VentureXpert™ Database by VE & NVCA
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
% of $ 4.80% 4.50% 5.80% 8.40% 18.10% 16.60% 14.00%
% of Deals 7.50% 7.70% 11.90% 16.20% 28.40% 33.10% 25.60%
1995 1996 1997 1998 1999 2000 1H2001
17© 2001 Massachusetts Institute of Technology
Recent Quarters Portend a Return to Traditional Activity Levels
Source: VentureXpert™ Database by VE & NVCA
18© 2001 Massachusetts Institute of Technology
2000 IPOs Edge Out 1999 Record Levels Despite a Bouncy Road
Source: VentureXpert™ Database by VE & NVCA
19© 2001 Massachusetts Institute of Technology
Acquisitions are an Increasingly Important Exit Strategy
Source: VentureXpert™ Database by VE & NVCA
20© 2001 Massachusetts Institute of Technology
Why Invest If You Can’t Find the Exit Door?
Source: VentureXpert™ Database by VE & NVCA
IPO Markets are Dormant
0
10
20
30
40
50
# V
entu
re B
acke
d IP
Os
2000
-01
2000
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2000
-05
2000
-07
2000
-09
2000
-11
2001
-01
2001
-03
2001
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# VB IPOs by Month
21© 2001 Massachusetts Institute of Technology
These are Increasingly ImportantAcquisition Markets Have Slowed Down Too
The “currency” of the average NASDAQ company has lost 50.4% in the past year.
Most acquirers of venture backed companies are publicly-traded high technology companies (often themselves venture backed).
22© 2001 Massachusetts Institute of Technology
Average Early and Seed Stage Round Sizes Have Crested
Source: VentureXpert™ Database by VE & NVCA
23© 2001 Massachusetts Institute of Technology
Venture Capitalists Continue to Fund Early and Seed Stage Companies – Future Pipeline
Source: VentureXpert™ Database by VE & NVCA
24© 2001 Massachusetts Institute of Technology
First Venture Rounds into Internet-Related Companies Continue
Source: VentureXpert™ Database by VE & NVCA
Although at a Much-Reduced Level from 2000
$0
$5,000
$10,000
$ Mil 1,243 2,260 3,471 6,422 8,378 8,374 6,776 3,727 2,492 1317.6
1999-1 1999-2 1999-3 1999-4 2000-1 2000-2 2000-3 2000-4 2001-1 2001-2
25© 2001 Massachusetts Institute of Technology
Scaling the Industry: Growth in VC Principals Has Not Kept Up With Growing Fund Sizes
Source: VentureXpert™ Database by VE & NVCA
26© 2001 Massachusetts Institute of Technology
Venture Principals are Busier than Ever!
Source: VentureXpert™ Database by VE & NVCA
2.0
2.5
3.0
3.5
4.0
4.5
Taylorian Coefficient
showing relative
workload of VC principals
as function of # of investees
Ratio 3.2 3 2.7 2.7 2.7 2.6 2.5 2.4 2.8 3.2 3.4 3.8 4.1
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
27© 2001 Massachusetts Institute of Technology
Source: Venture Economics
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28© 2001 Massachusetts Institute of Technology
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29© 2001 Massachusetts Institute of Technology
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30© 2001 Massachusetts Institute of Technology
Source: Venture Economics
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31© 2001 Massachusetts Institute of Technology
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36© 2001 Massachusetts Institute of Technology
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37© 2001 Massachusetts Institute of Technology
Source: Venture Economics
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Source: Venture Economics
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Source: Venture Economics
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Source: Venture Economics
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55© 2001 Massachusetts Institute of Technology
Source: Venture Economics
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56© 2001 Massachusetts Institute of Technology
Source: Venture Economics
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57© 2001 Massachusetts Institute of Technology
Five Year Performance TrendsUS Venture vs Buyouts
Source: Venture Economics
0
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1981
1982
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58© 2001 Massachusetts Institute of Technology
US Private Equity Performance BenchmarksUS Limited Partnerships Formed 1969-1999Investment Horizon Returns Net to Investors as of 9/30/2000
Source: Venture Economics
59© 2001 Massachusetts Institute of Technology
US Limited Partnerships Formed 1969-2000Investment Horizon Returns Net to Investors as of 12/31/2000
Source: Venture Economics
60© 2001 Massachusetts Institute of Technology
Companies Receiving First Venture Round (Series A) During Last Downturn (1/1990-6/1992) Artisoft
Starbucks
Intuit (FKA ChipSoft)
McAfee
Xpedite
Palm Computing
Cutter & Buck
RF Micro Devices
eFax.com
Shiva Corporation
Wind River Systems
FTP Software
CheckFree
SPSS
61© 2001 Massachusetts Institute of Technology
1. Our Mission & Focus
2. Past Business and Venture Cycles
3. Current Scene: Trends in Start-ups and VC
4. Future Outlook
Proposed Outline
62© 2001 Massachusetts Institute of Technology
Current Scene: B2B = Back to BasicsThe Laws of Gravity Were Never Repealed
Entrepreneurs need to have outstanding: Team Technology Value Proposition Market Customers
Applies to VCs as well…
63© 2001 Massachusetts Institute of Technology
Entrepreneurs: Building Your Company Need an “A” Team – “3K” experience
Serious Technology – sustainable advantage
Solve an important, valuable problem…
For clients who have money …
Who want to pay well…
With a short sales cycle…
And will buy more, soon …
YOUR VALUE PROPOSITION MUST BE COMPELLING, QUANTIFIABLE, PROVEABLE, REFERENCEABLE, AND EASILY EXPLAINABLE…
64© 2001 Massachusetts Institute of Technology
Our Message to Entrepreneurs: – Selecting Your Financial Partners Seek True Value Added – “Blue” Money
Operating Experience Rolodex/Network Awesome Portfolio (in your space) Cool Limiteds (in your space) Deep pockets / courage to stay the course
Keep Realistic Expectations Time to Market Revenue growth Valuations
65© 2001 Massachusetts Institute of Technology
Entrepreneurs’ Funding: Many Options Your Personal Funds
“3F” – Friends, Family, and Fools
Personal Credit Cards and Other Borrowings
Business Angels
Venture Capital
Corporate Direct Investment
Venture Leasing
Mezzanine Financing
Merger and Acquisition
Initial Public Offering
Secondary/Follow-on Public Offering
Private Placements – Debt & Equity
Buyout/Acquisition Financing
Corporate Debt
66© 2001 Massachusetts Institute of Technology
1. Our Mission & Focus
2. Past Business and Venture Cycles
3. Current Scene: Trends in Start-ups and VC
4. Future Outlook
Proposed Outline
67© 2001 Massachusetts Institute of Technology
Future Outlook: After the Shakeout
The superficial VC gamblers are dying or dead.
A line of bull + .ppt is no longer enough. DAD >> MBBB
The number of MIT spin-offs and $50K teams have not decreased significantly.
Serious entrepreneurs, angels, and VCs are quietly and carefully moving forward.
This is a great time to be starting a company:Expectations and time horizons are realistic.
Recruiting top talent is easier.
Office space is available, at more reasonable prices.