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Overview of Venture Capital …and why it matters !

Overview of Venture Capital …and why it matters !. Jerome S. Engel September 2005. Jerry Engel. UC Berkeley Founder and Executive Director of the Lester Center for Entrepreneurship and Innovation Chair of the Entrepreneurship Faculty

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Overview of Venture Capital …and why it matters !

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  1. Overview of Venture Capital…and why it matters ! Jerome S. Engel September 2005

  2. Jerry Engel • UC Berkeley • Founder and Executive Director of the Lester Center for Entrepreneurship and Innovation • Chair of the Entrepreneurship Faculty • Teach Entrepreneurship, Venture Capital & Private Equity, Technology Commercialization in the MBA and Executive Education programs • Outside of Academe: • Monitor Venture Partners, General Partner • Co-founded: Kline Hawkes Capital, AllBusiness.com, ElectraScan Inc., Maxis, CardioProfile, and more… • Angel Investor, Board member, Advisor • 1980s • Ernst&Young, Managing Partner • Entrepreneurial Services • Apple, Intel, Genentech, Sun, Autodesk, more.. • 1970s – KPMG • Academic - Wharton

  3. Probing upper thermospheric neutral densities at Mars using electron reflectometry

  4. Overview of Venture Capital…and why it Matters! • Entrepreneurship is a key driver of value creation in the 21st century American economy • An approach to that starts with the recognition and pursuit of opportunity • The opportunity must be compelling to enable the entrepreneur to attract the necessary resources • Special mechanisms exist to enable resource alignment with the best opportunities • Venture Capital is such a mechanism • Venture Capital is more than money • It is a market mechanism • It is this subtlety that makes rare

  5. Value Technology / Opportunity Entrepreneurship Bridges the Gap Entrepreneurship

  6. Entrepreneurship The pursuit of Opportunity beyond the Resources you currently control

  7. Identify Need Solution ‘Unfair Advantage’ Acquire: Technology rights People Money Entrepreneurial Process } Opportunity } Resources

  8. Entrepreneurial Process • Key Mechanism: • Mobile Technology • Mobile People • Mobile Money People Technology Money

  9. The Entrepreneurial VentureFOUR PERIODS of DEVELOPMENT I II III IV Cash Flow Time

  10. The Entrepreneurial VentureFOUR PERIODS of DEVELOPMENT “Pure entrepreneurship” Cash Flow Time

  11. I II III IV Cash Flow Time The Entrepreneurial VenturePERIOD I: “Pure Entrepreneurship” • Defining the concept of the business • Gathering financial resources • Assembling the startup team • Identifying customers • Analyzing the competition • Building the prototype • Getting your first ‘customer’

  12. The Entrepreneurial VentureFOUR PERIODS of DEVELOPMENT “Strategic focus” Cash Flow Time

  13. I II III IV Cash Flow Time The Entrepreneurial VenturePERIOD II: “Strategic Focus” • What business aren’t we in? • IMPLEMENTING the business are we in! • Knowing better than ANYONE else: • What will people pay • How many will they buy • How to distribute • How to service the customer • Identifying strategic partners • Developing relations with suppliers • Going beyond the prototype to a truly scaleable product • Recruiting a complete team • Raising ‘institutional’ money

  14. The Entrepreneurial VentureFOUR PERIODS of DEVELOPMENT “Systems building” Cash Flow Time

  15. I II III IV Cash Flow Time The Entrepreneurial VenturePERIOD III: “Systems Building” • Financial controls • Stable division of labor • Reporting relationships and authorities • Developing systems of internal control • Formalizing the terms of a sale • Operational systems • Production, outsoucing • Distribution, sales • Service, warraties

  16. The Entrepreneurial VentureFOUR PERIODS of DEVELOPMENT “Corporate management” Cash Flow Time

  17. I II III IV Cash Flow Time The Entrepreneurial VenturePERIOD IV: “Corporate Management” • Hiring “outsiders” • Going public • Adding the follow-on product[s] • Shedding those who can’t keep up • Formalizing the culture • Rationalizing the strategy

  18. The Professional Entrepreneur I II III IV Visioning the Future into the Present Cash Flow Time

  19. New Venture Funding Stream Sales $ Cash Flow $80 IPO $40 $20 $8 $1 Time Venture Capital Rounds Financing to Milestones

  20. New Venture Funding Stream Sales $ Cash Flow $80 IPO $40 $20 $8 $1 Time Venture Capital Rounds Investment Corporate “Window” and Spin-outs

  21. New Venture Funding Stream Sales $ Cash Flow $80 IPO $40 $20 $8 $1 Time Venture Capital Rounds Investment Corporate “Window” and Spin-outs Acquisition Corp Growth

  22. U.S. Example:Private R&D Spending Increasing TOTAL PRIVATE FEDERAL Note: Expenditures are deflated using the GDP implicit price deflator. Source: National Science Board (2000) and Economic Report of the President (2002)

  23. The Proportion of Research Expenditure atOur Largest Corporations is Decreasing Original - H. Chesbrough, 2003 Updated J. Engel 2003 Source: National Science Foundation, Science Resource Studies, Survey of Industrial Research Development, 1991,1999 and 2000.

  24. The State of the Venture Capital Industry September 2005 Jerome S. Engel Venture Capital & Private Equity Reminder: Entrepreneurs Forum Thursday night

  25. Entrepreneurs Perspective Limited Partners Perspective Investment Opportunity General Partners Perspective Venture Capital and Private Equity …require a convergence of interests

  26. Instutional Investors PerspectiveVC is a sub-category of Private Equity What is Private Equity? • Venture Capital [our principal focus] • Leveraged Buyouts • Mezzanine Investments • Build-ups/Roll-ups • Distressed Debt Characteristics: • Generally structured as a partnership • Huge growth in funds [$5b in 1980 to over $250b today] • Still a relatively small allocation [only $1 for every $40 in public equities] • Instability and volatility in valuations and funds flows • Demand and Supply likely to expand, especially overseas

  27. 20 Years of Venture Capital ? 279% Sources: Asset Alternatives, Cambridge Associates, CSI, Inc.

  28. VC Investment1980 – The Long View ($ in billions) Annual Venture Capital Investments 1980 to YTD Q3 2004

  29. U.S. Fundraising

  30. Fundraising Running at ’96-’97 levelsCommitments to Venture Capital Funds

  31. Median Fund Size Continues to increase after the shake-out Median VC Fund Size (for funds greater than $20M)

  32. Half of Funds Closed > $100M in Size Allocation of Fund Size by Number of Funds Raised per Vintage Year

  33. U.S. Investment: Overall

  34. Deal Flow and Investment On Track with 2004Deal Flow and Equity into Venture-Backed Companies Amount Invested ($B) Number of Deals Source: Dow Jones VentureOne/Ernst &Young

  35. IT dominates VC Investing [Health Care #2]Deal Flow Allocation by Industry Sector % of Total VC Rounds Source: Dow Jones VentureOne/Ernst &Young

  36. Comm’s Share of IT Dollars Highest Since 4Q’02IT Investment Allocation by Sector % of Dollars Invested Source: Dow Jones VentureOne/Ernst &Young

  37. Healthcare Activity Strong and SteadyEquity into Venture-Backed Healthcare Companies Amount Invested ($B) Number of Deals Source: Dow Jones VentureOne/Ernst &Young

  38. Biopharm & Devices Dominate HC InvestmentHealthcare Investment Allocation by Sector % of Dollars Invested Source: Dow Jones VentureOne/Ernst &Young

  39. More than half of VC deals are seed or first roundDeal Flow Allocation by Round Class % of Total VC Rounds Source: Dow Jones VentureOne/Ernst &Young *Seed and First Rounds Combined

  40. Round Allocation Mirrors Mid-’90s LevelsDeal Flow Allocation by Round Class (Annual) % of Total VC Rounds Source: Dow Jones VentureOne/Ernst &Young *Seed and First Rounds Combined

  41. More than ½ of Dollars Go To Later RoundsInvestment Allocation by Round Class (Annual) % of Dollars Invested Source: Dow Jones VentureOne/Ernst &Young *Seed and First Rounds Combined

  42. Median Deal Sizes Relatively ConsistentMedian Amount Invested Per Financing Round Median Amount Invested ($M) Source: Dow Jones VentureOne/Ernst &Young

  43. Early Stage Deals are ½ Size of Later RoundsMedian Amount Invested by Round Class , VC Only Median Amount Invested ($M) Source: Dow Jones VentureOne/Ernst &Young

  44. Amount Invested in Rounds at Late 90’s LevelsMedian Amount Invested by Round Class (Annual), VC Only Median Amount Invested ($M) Source: Dow Jones VentureOne/Ernst &Young

  45. U.S. Investment: Regions

  46. Bay Area Draws Most Dollars, NY Metro 2ndRegional Investment in the United States 2Q’05 Source: Dow Jones VentureOne/Ernst &Young

  47. 2 Out of 5 Deals in CaliforniaRegional Deal Flow in the United States 2Q’05 Source: Dow Jones VentureOne/Ernst &Young

  48. Most Deals are SyndicatedNumber of Investors Per Round Source: Dow Jones VentureOne/Ernst &Young

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