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Peter Moran Perspectives from the Venture World Leaders for Manufacturing Conference

Peter Moran Perspectives from the Venture World Leaders for Manufacturing Conference October, 23 2003. Thoughts from Venture World. Gaining lift off “Wild West” to “Exciting East” LFMs in Start-ups. Thoughts from Venture World. Gaining lift off What is Venture Capital Venture Trends

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Peter Moran Perspectives from the Venture World Leaders for Manufacturing Conference

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  1. Peter Moran Perspectives from the Venture World Leaders for Manufacturing Conference October, 23 2003

  2. Thoughts from Venture World • Gaining lift off • “Wild West” to “Exciting East” • LFMs in Start-ups

  3. Thoughts from Venture World • Gaining lift off • What is Venture Capital • Venture Trends • Reaching Escape Velocity • “Wild West” to “Exciting East” • LFMs in Start-ups

  4. Thoughts from Venture World • Gaining lift off • What is Venture Capital • Venture Trends • Reaching Escape Velocity • “Exciting East” • LFMs in Start-ups

  5. Fund Source Fund of Funds Family Offices Advisors Pension Funds University Endowments Corporate Treasury High Wealth Individuals Banks Insurance Companies Venture Capital as an Asset Class Asset Class Portfolio Public stocks Public bonds Private Equity Real Estate Venture Capital Buyout/Mezzanine

  6. “Venture Capital Is …”Depends upon where you stand • Investment • Capital • Leadership & contacts • Economic development • Commercializer • Innovation engine • Job creator • Research magnet

  7. Importance 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

  8. Job Creation by Startups in the USA Major Source of Job Creation from Hi-Tech Start-ups 1990-1995 Share of Growth in number of Companies Share of Net New Jobs 22%20-499 Employees 28%20-499 Employees 10%>500 Employees 24%>500 Employees 48%< 20 Employees 68%<20 Employees Source: Small Business Administration from Bureau of Census

  9. Venture funded firms 12.5 million employees Annual revenues of $1.1 trillion Impact of Venture Capital Represent 9.7% of US payroll 11% of US GDP 6.7% of US co revenue Source: DRI-WEFA (analysis as of 8/2001)

  10. Venture Impact, Cont. Venture Investment 1970-1999 For $1 For $22K Impact In 2000 $9 in Revenue 1 job Source: DRI-WEFA (analysis as of 8/2001)

  11. R&D Spending - Top 15 Global IT Players 1991 2002 R&D as % of Market Cap R&D as % of Market Cap 10% 5% Acquisitions of innovative start-ups substitute for R&D of large companies Source: DCM Research

  12. Venture by State Venture Backed Jobs (000s) Venture Backed Revenue ($B) • California 1,400 • Texas 676 • Pennsylvania 425 • Massachusetts 381 • New York 369 • Georgia 338 • Washington state 264 • New Jersey 260 • California 270 • Texas 158 • Pennsylvania 58 • Massachusetts 49 • New York 66 • Georgia 63 • Washington State 75 • New Jersey 38 *Tennessee 382 Source: DRI-WEFA 2001 study

  13. Thoughts from Venture World • Gaining lift off • What is Venture Capital • Venture Trends • Reaching Escape Velocity • “Exciting East” • LFMs in Start-ups

  14. Sub 0.2% US GDP Venture Capital Explosion 1% US GDP Commitment to US Venture Capital $ Million Invested Source: PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree™

  15. The Overhang 1,800 Acquired 900 TakenPublic 1,500 10,000 Shut Down 5,800 ($100 BInvestedCapital) CompaniesRemaining CompaniesFunded

  16. 2003 Investment Continues to Fall Deal Flow and Equity into Venture-Backed Companies (Annual) 6,000 5,000 $93.9 $100 4502 4,000 $75 3112 3,000 Amount Invested ($B) 2520 $49.2 Number of Deals 2198 $50 2156 1901 $35.4 2,000 $20.3 $25 866 $17.8 1,000 $13.1 $9.9 $7.5 $0 0 1996 1997 1998 1999 2000 2001 2002 1H03 Amount Invested ($B) Number of Deals Source: VentureOne/Ernst & Young

  17. VC Funding Bottoms? Amount Invested $M # of Financing Rounds 1st Growth in 6 Quarters Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2 Q3 Q4 Q1 Q2 2001 2001 2002 2003 2002 2003 Source: VentureSource

  18. Valuations at Mid-’90s Levels Median Premoney Valuation by Year $30 $26.0 $25 $22.0 Median Premoney Valuation ($M) $20 $16.8 $15.5 $12.6 $15 $11.2 $10.7 $10.5 $10.0 $9.5 $8.5 $10 $5 $0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 1H03 Source: VentureOne

  19. Equity Investment by Industry Sector % of Investment Source: VentureOne/Ernst & Young

  20. M&A Opportunities Stable in 2Q’03 Transactions and Amount Paid in M&As 125 116 125 109 110 104 103 103 $50 $45.7 95 100 92 Amount Paid ($B) 87 86 83 $40 67 75 63 Number of Transactions $30 $23.8 $20.3 50 $20 $11.8 25 $7.5 $10 $5.6 $4.9 $3.5 $3.2 $2.7 $2.7 $2.7 $2.3 $1.9 $0 0 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 Amount Paid ($B) Number of Transactions Source: VentureOne

  21. Not Much Profit in Current M&As Median Amount Paid in M&As vs. Median Investedin Private Rounds Prior to M&A 21.0 20 15.4 $100 14.7 15 $80 11.3 Median Invested in Private Rounds ($M) 10 $60 10.4 MedianAmount Paid ($M) 7.0 5.7 $40 5 5.5 $20 $40 $34.3 $31.1 $55.2 $100 $26 $19.7 $18.2 $0 0 1996 1997 1998 1999 2000 2001 2002 1H03 Median Amount Paid ($M) Median Raised in Private Rounds ($M) Source: VentureOne

  22. IPO Liquidity Remains Rare Deals and Amount Raised Through IPOs 71 70 60 Amount Raised ($B) $7.6 $10 $6.7 Venture-Backed IPOs 40 43 $3.5 $5 18 20 8 9 $1.5 5 4 4 4 6 2 1 $.8 0 $.5 $.9 $.4 $.3 $.3 $.2 $.2 $.03 $0.00 $0 0 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 Amount Raised ($B) Venture-Backed IPOs Source: VentureOne

  23. Nikkei at 19-Year Low 19 2003 11,025

  24. Equity Returns Annual Returns, Percent 1 Year 5 Years 20 Years -26.1 47.9 19.8 Early/Seed VC All Venture All Private Equity NASDAQ S&P 500 16.1 -27.4 24.2 13.8 -6.9 6.1 10.8 12.7 -3.1 -1.5 -3.0 11.6 As of 6/30/03Source: Thomson Venture Economics/NVCA

  25. Thoughts from Venture World • Gaining lift off • What is Venture Capital • Venture Trends • Reaching Escape Velocity • “Exciting East” • LFMs in Start-ups

  26. Beating the Net Startup Odds Went Public/Acquired 1 in 833 business plans made it big 605 3-5,000 Received Venture Capital 1 in 173 receive VC funding Received Other Financing 5-15,000 2 in 10 ideas become business plans Business Plans Shopped 500,000 2.25 Million Entrepreneurs with a big idea Totals from 1994 through first-quarter 2000Source: Estimates from The Standard based on data from VentureOne, Garage.com, primary research and venture capital firms

  27. Systematic, Long-Term Process of Risk Reduction through each Phase 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)

  28. Sometimes 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

  29. VC Mindset “Venture capitalists make lemmings look like rugged individualists.” • Mark F. Radcliffe, Gray Cary Ware & Freidenrich

  30. VC Mindset

  31. Thoughts from Venture World • Gaining lift off • What is Venture Capital • Venture Trends • Reaching Escape Velocity • “Exciting East” • LFMs in Start-ups

  32. A New Alarm Bell U.S. Manufacturing Jobs Millions 2.7 million jobs lost in 3 years, includes 400,000 In High-Tech … And It’s Not Just Manufacturing Jobs!

  33. Shanghai 1980s Shanghai 2003 Emergence of “Exciting East”

  34. U.S. is Not Center of Universe “Think Outside The Box”

  35. International: PC & Workstation Market 2002 2007 12% 16% All Others Western Europe Asia (includes Japan) USA 27% 25% 27% 34% 34% 25% Total $156B Total $166B Source: IDC Confidential and Proprietary

  36. International: Network Equipment Spending Growth Rates 25% USA 21% Asia Pacific(ex-Japan) 19% 20% 18% 15% 11% 9% 9% 9% 10% 5% 3% 2% 0% -2% -5% 2003 2004 2005 2006 2007 Source: IDC

  37. China Telecom Spending China Telecom Capex as % of US 46% 37% 28% 20% 2000 2001 2002 2003 US Capex China Capex $136 $ 27 $119 $ 33 $68 $25 $54 $25 Source: CSFB, MIT

  38. Enablers • WTO • Beijing Olympics • Break-up of China Telecom • Leapfrog deployments • VoIP • Metro Ethernet • BB wireless • Local VCs emerging SelectiveOpportunitiesfor Venture Investment China Communications Opportunity Facts • Fastest growing telecom infrastructure CapEx • 14% wireline penetration • Fastest growing & largest wireless market • 190M subscribers • 150M+ white collar workers • Rapid growth to 300M

  39. Technology Companies with Significant Asian Revenue Companies With Primary Listing in U.S.(US $MM) Market Value as of Apr. 23, 2002 Market Value as of Sept. 18,2003 Company % Change $ 2,332 32 73 39 245 470 212 17 50 23 68 UTStarcom Neatease.com Sina.com Sohu.com Chinadotcom AsiaInfo ASAT Holdings Rediff Gigamedia Pacific Internet Kareo Thrunet $ 3730 2020 1950 1460 1010 375 284 155 110 107 N/A 60% 6213% 2571% 3644% 312% -20% 34% 811% 120% 365% N/A

  40. Cost To Build a Semi Company US/Silicon Valley China Science/ Engineering Grads 465,000 480,000 Avg. Wage Semiconductor Designer $11-14k/yr $120k/yr Total investment to build semi co. to cash flow positive $15-22M $35-45M

  41. New Company Formation – Necessary Conditions USA PRC 1980 – 2000 1995 2000 • 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 Yes Yes Yes Coming No Yes Yes++ Coming Yes Yes No No Yes No Yes No No Yes Yes No No Starting No No Morgan Stanley Dean Witter & Co.

  42. Caution Urban Myth Truth Billions, billions everywhere The bottom impose a heavy tax Local distribution and local functionality are necessary for entry The Urban Myth is still largely TRUE Burdens of size stifle innovation or early adoption in China Get the right technologies / all the other risks still apply The Party will not let anybody else in to the country Will pretend to want to partner and will end up building – a la MSFT The legal system is terrible and structures are unstable at best Is still weaker than more developed countries. Summary of Common Investment Hypotheses for China Market Size Only 300-400 million addressable market Chinese Partners and customers are increasing acceptance of foreign brands and goods Technology Localization Several key technologies are being deployed first in China Technology Innovation Political Risks Have succumbed to partnering route to market in select cases Some of the unstable structures are working. Genuine commitment. Legal / Fin. Structures

  43. Silicon 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

  44. Political Risk - Summary Source: The Economist

  45. Case 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

  46. Domestic IC Supply Lags Far Behind Demand Shortage:1,087K 8” wafers per month – approx. the capacity of 30 8” fabs or 12 12” fabs 1,600 1,400 ’02-’06 Wafer Demand CAGR: 24.5% 1,200 Shortage:528K 8” wafersper month Supply 1,000 Demand # of 8" Wafers per Month ('000) 800 600 400 200 0 2000 2001 2002 2003 2004 Domestic IC supply shortage is expected to be doubled by 2006 Source: Dataquest (2002), CSFB Estimates

  47. Record Fab Ramp Up SMICIncorporated Construction of Fab 1 begins Fab 1 begins production 2000 2001 2002 April May June Sept. 15 Months Reach Critical Scale in Just 3 Years # of Years to Reach Capacity of 45,000 Wafers/Month # of Years to Reach US $300M Revenues 2000-2003 1987-1992 1980-1987 2000-2003 1987-1993 1980-1993 13 7 5 6 3 3 SMIC TSMC UMC SMIC TSMC UMC Source: JPMorgan estimates, company reports Note: SMIC’s wafers are 8”, TSMC’s wafers were 6”, UMC’s wafers were 4”

  48. Good Reading

  49. Thoughts from Venture World • Gaining lift off • What is Venture Capital • Venture Trends • Reaching Escape Velocity • “Exciting East” • LFMs in Start-ups

  50. Know Your Goals • Fortune • Fame • Family • Fervor • Friends

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