chairman-elect us national venture capital association; cofounder and general partner, dcm 35 years...

Chairman-elect US National Venture Capital Association; Cofounder and General Partner, DCM

35 years of US Venture Capital — A Historical Perspective for China

2007 CVCA Annual Meeting& China Venture Capital/Private Equity Summit November 2, 2007

Dixon Doll

AgendaAgenda

Evolution of U.S. VC industry, why a flourishing VC industry is important for China

Proper role of public policy Putting U.S. lessons learned in context for China

going forward – key messages

Confidential & Proprietary2

Confidential & Proprietary

US Venture Capital Investment in PerspectiveUS Venture Capital Investment in Perspective

US GDP $12.5 trillion annually Hedge fund intake $1.5 trillion over last 3 years estimated Mutual fund intake $158 billion in 2006 Buyout intake $103 billion in 2006 Venture capital intake $28.6 billion in 2006

• Venture capital fundraising & investment Is 0.2% of total GDP

Source: BLS website, Investment Company Institute, Thomson Financial, NVCA

3


Venture-Backed EmploymentVenture-Backed Employment

VC-Backed US Jobs (millions) As a % of total US Pvt Jobs in 2006

Outpaces 2003 - 2006 Total US Job Growth

VC-Backed Jobs = 9%

Source: Venture Impact 2006 by Global Insight

4

Global Insight StudyGlobal Insight Study

In 2006, venture backed companies:

• Provided 10.4 million U.S. jobs

• Had sales of $2.3 trillion

Represents 17.6% of GDP Still dominated venture-created sectors

• 56% of biotech revenue

• 78% of computer and peripherals revenue

• 94% of computer and peripherals jobs

• 88% of software sector jobs Outgrew the economy 2003-2006 in every sector


Source: Venture Impact 2006 by Global Insight


“Buy Low… Sell High” Is Easier if You Really Buy Low!“Buy Low… Sell High” Is Easier if You Really Buy Low!

CompanyTotal Venture

Investment $M

Recent Market Cap/ Acq Price

$M (4/2007)

Cisco 3 163,000

eBay 7 45,890

Amazon.com 8 18,640

Apple 9 78,000

YouTube 12 1,650

Google 40 150,000

JetBlue 173 2,000

WebVan 441 06

Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data: Thomson Financial



VC Investment Peaked in 2000; Recently 20-23% of Peak; 2006 Was Higher VC Investment Peaked in 2000; Recently 20-23% of Peak; 2006 Was Higher

Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report, Data: Thomson Financial

7


IPO Levels Jumped in 2004 but not Sustained; New Hope in 2007?IPO Levels Jumped in 2004 but not Sustained; New Hope in 2007?

Source: Thomson Financial/National Venture Capital Association

8


State of Venture Capital – at Steady State State of Venture Capital – at Steady State Deal Flow and Equity into Venture-Backed Companies

Source: PricewaterhouseCoopers – NVCA Moneytree™ report, Data: Thomson Financial

Amount Invested ($B)

Dollars Raised by U.S. VC Funds ($B)

$9.2$11.2 $12.5

$46.3

$87.7

$36.4

$22.2$19.7

$22.5 $24.0 $26.7

9


Key U.S. VC Building Blocks…Key U.S. VC Building Blocks… Capital formation

• Prudent man rule – enabled pension investment• LP laws• Capital gains tax reduction

Empowered entrepreneurs• Capital gains tax reductions• Stock options/team building tools• Reasonable bankruptcy laws

Protect companies – IP laws Abundant customers willing to do business with SMEs Exit markets – the NASDAQ Face-to-face investing/proximity Cultural acceptance

10


Building Blocks of the U.S. Venture Capital IndustryBuilding Blocks of the U.S. Venture Capital Industry

Unparalleled university research High quality universal education Proximity to talented entrepreneurs and engineers Deep, liquid transparent capital markets

11


The Number of U.S. VC Firms has Peaked . . . ThankfullyThe Number of U.S. VC Firms has Peaked . . . Thankfully

At Year End # Venture Firms

Capital Under Mgt

1970 28 $1B

1980 89 $4B

1990 395 $30B

2000 881 $228B

2001 946 $255B

2006 798 $235B

Source: 2007 NVCA Yearbook, prepared by Thomas Financial

12


United States- 56% Since 2000

Europe- 60% Since 2000

Israel- 65% Since 2000

13

Note: Chart scales vary for claritySource: Ernst & Young/Dow Jones Venture One

Number of Active IT VC Firms DecliningNumber of Active IT VC Firms Declining

2206

1767

13641157

1012 960

974

862

661

556

420 391

376

299

221205

130

205


Globalization of VC and TechnologyGlobalization of VC and Technology

VC is truly a global business• Entrepreneurs live and start companies everywhere • Low-cost centers of technological excellence distributed globally• Other potential markets to emerge (India, Eastern Europe, Russia)

Portfolio companies are increasingly global• Companies must utilize global centers of technological excellence• International markets more important for select disruptive technologies• Companies must access many international markets from the get go

Emergence of many new important sectors like Cleantech

14


Cleantech Investments (US $M)Cleantech Investments (US $M)

Source: Dow Jones VentureOne and Ernst & Young

25% CAGR

21% CAGR

195% CAGR

15


Important VC – Related Public Policy IssuesImportant VC – Related Public Policy Issues

Tax policy encouraging risk taking and company formation

Long-term support for University, government R&D Creating entrepreneur friendly

• Legal system (creating law)• Court system (enforcement)

Intellectual property protection Investor friendly, confidence inspiring, securities

regulatory system

16


Government Policies Can Be Harmful to VCGovernment Policies Can Be Harmful to VC

Misguided overreaching U.S. government policies, regulations, like Sarbox have harmed domestic VC industry by

• Sharply reducing IPOs• Increasing costs of going public, ongoing compliance

17

Beware of Unintended Consequences


A Tale of Two MarketsA Tale of Two Markets

5,049

2,525

2000 Peak(3/10/2000)

NASDAQ

4/30/2007

(50%)

11,72313,063

2000 Peak(1/14/2000)

Dow

4/30/2007

+ 11%

There are significant disparities between tech markets and capital markets in general

18


Tech IPOs Continue to DeclineTech IPOs Continue to Decline

# of U.S. VC Backed Tech IPOsAmount Invested ($B) $90B

$80B

$70B

$60B

$50B

$40B

$30B

$20B

$10B

0

105

6046

180

108

10 106 1118 20 17

$9.2 $11.2 $12.5

$46.3

$87.7

$36.4

$22.2$19.7 $22.5 $24.0 $26.7

$14.5

Source: VentureSource and National Venture Capital Association MoneyTree™ Report

19


Source: Thomson Financial/National Venture Capital Association

M&AIPO

Nu

mb

er o

f E

xits

M&A Has Become the Primary Venture ExitM&A Has Become the Primary Venture Exit

Annualized

20


Global Private Equity MarketGlobal Private Equity Market

Source: Marketview

More U.S. Companies Have Gone Private but Q3’07 May See a Slowdown

25%

20%

15%

10%

5%

0%

% o

f U.S

. M&

A V

olu

me

Pri

vate

Eq

uit

y V

olu

me

($U

SB

)

21


Weak US Capital Markets Offset by Global StrengthWeak US Capital Markets Offset by Global Strength

Source: World Federation of Exchanges, 10/23/06

North America4 Exchanges$19.9 TrillionNYSE $14.4TNASDAQ $3.7T

Latin & SouthAmerica7 Exchanges$1.1 Trillion

Middle East &Africa4 Exchanges$0.8 Trillion

Europe18 Exchanges$13.4 TrillionLondon $3.4TEuronext $3.4T Asia-Pacific

17 Exchanges$10.2 Trillion*Tokyo $4.4THong Kong $1.4T

* Osaka & the National Stock Exchange of India are not included in the total for Asia-Pacific to avoid double counting Tokyo & Bombay

22


Capitalization of Global MarketsCapitalization of Global Markets

Source: World Federation of Exchanges, 2006

Development of Markets Abroad is Healthy

2005200420032002200120001999199819971996199519941993199219911990

23

Tax Policy is an Important LeverTax Policy is an Important LeverCapital gains tax revenue forecast vs actual in billions

Tax

Rev

enu

e in

Bil

lio

ns

Source: Treasury Department and Congressional Budget Office


Bush tax cuts2003

Latest CBO estimates

Individual Long-Term Capital Tax Rates 2005-2006Individual Long-Term Capital Tax Rates 2005-2006

The rates are based on long-term capital gains tax rates applicable to gains on sales of share.*Long-term capital gains listed securities are exempt. Source: Individual Taxes 2004-2005, Worldwide Summaries (PricewaterhouseCoopers), European Tax Handbook 2005 (International Bureau of Fiscal Documentation) and various government web sites. Confidential & Proprietary25

0%0%0%0%0%0%0%0%0%0%0%0%0%0%

10%12.5%

14.5%15%15%

17.6%19%

20%20%

23.5%25%

26%28%28%

30%32%

43%

Currently

After Lapse (2011)

0%

20%20%

*


Total U.S. Tort CostsTotal U.S. Tort Costs

Source: Towers Perrin, 2006

Cost of Litigation is Growing in the U.S.

300

250

200

150

100

50

0

To

rt Co

sts ($B)

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

To

rt C

ost

s as

% o

f G

DP

26


% of WorldPopulation

4.81

U.S. China

20.35

4.35

U.S. China

19

Percentage of World PopulationPercentage of World Population

Source: Stocks for the Long Run and Future For Investors, Jeremy J. Siegel

27


Percentage of World’s GDPPercentage of World’s GDP

% of World’sGDP

21

U.S. China

1410

U.S. China

19

Source: Stocks for the Long Run and Future For Investors, Jeremy J. Siegel

28


Top Markets Where the Cost of Complying With Corporate Governance Regulation is Too HighTop Markets Where the Cost of Complying With Corporate Governance Regulation is Too High

U.S UK & Ireland

Canada India Austria, Germany,

Liechtenstein, Switzerland

Israel China NordicCountries

France, Italy,

Monaco, Portugal,

Spain

Benelux

29


Top Markets Where Regulation is Too Lax and Creates Additional Business RiskTop Markets Where Regulation is Too Lax and Creates Additional Business Risk

India Central/EasternEurope

China CIS & Russia

LatinAmerica

Other Asia MiddleEast

(excl Israel)

Africa Israel South Korea

30


Top Markets Where Intellectual Property Laws Create Additional Financial RiskTop Markets Where Intellectual Property Laws Create Additional Financial Risk

China India U.S. Israel OtherAsia

Canada SouthKorea

LatinAmerica

MiddleEast

(excl. Israel)

Central &EasternEurope

31


Public Policy Implications for ChinaPublic Policy Implications for China

Establishment of one industry voice, CVCA, is an important positive step

Creation of the domestic Shenzhen, Shanghai Exchanges also desirable

Caution against overregulation which could discourage new company formation and restrict foreign capital inflows

Importance of strong capital market oversight and governance agencies like CSRC

32


Key Messages SummarizedKey Messages Summarized

China VC industry today still in very early stage (roughly same as U.S. in late 70’s)

Industry always has been cyclical – new cycle every 10-12 years. Anticipate downturns.

Flourishing VC industry a crucial element for leveraged job creation, innovation, and long-term economic growth

33


Key Messages Summarized (cont.)Key Messages Summarized (cont.)

Public policy plays major role in successful evolution of VC industry

• Taxation, Legal, R&D Support, Governance, Etc.

Excessive government intervention has periodically damaged U.S. VC industry (Sarbox)

NVCA in U.S. has played important role in influencing public policy - I strongly encourage CVCA to do the same in China

Thank You.

34

chairman-elect us national venture capital association; cofounder and general partner, dcm 35 years...

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