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NVCA 4-Pillar Plan to Restore Liquidity in the U.S. Venture Capital Industry

April 29/30, 2009Dixon Doll

DCM Co-Founder and General Partner, NVCA Chairman

Mark HeesenNVCA President

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Reinvigorating Liquidity in the U.S. VC Industry

The Background

Financial Crisis & IPO Drought Revealed Systemic Issues

The Situation

● Liquidity Challenges● Lack of IPOs Is

Harmful to Job Creation and Overall Economy

● Comprehensive Review of VC Ecosystem Is Required to Reinvigorate Our Industry (once Markets Stabilize)

Job Creation

IEcosystem

Partners

IIEnhanced Liquidity

Paths

IIITaxation

IVRegulation

VC Industry U.S. Government

Innovation

The Solution

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Venture Capital Fuels Job Creation

Sources: Left: Global Insight, 2009Right: NVCA, Global Insight and Survey of Top 136 VC-Based Companies That Went Public 1970–2005

VC-Backed CompaniesCreate Jobs Faster

Employment CAGR (2006 – 2008)

12.1M Jobs Created12.1M Jobs Created

92% of Job GrowthOccurs Post-IPO

VC-Backed Company Employment Growth

97% 94% 88% 76% 92%

Pre-IPO Post-IPO

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F

Numerous World-Leading Companies Were First Funded or Founded During Downturns

1970s1970s 1980s1980s 1990s1990s 2000s2000s

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2000s

Dramatic Decline in IPOs in the 2000’s

Source: Thomson Reuters/NVCA

1990s

IPOs56%

M&A44%

(’92 – ’00)

Number of Venture-Based IPOs vs. M&A Exits

Lack of IPOs Is Harmful to Job Creation and EconomyLack of IPOs Is Harmful to Job Creation and Economy

1,776IPOs

392IPOs

IPOs13%

M&A87%

(’01 – ’08)

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IPOs in Decline This DecadeNumber and Value of Venture-Backed IPOs in the U.S.

IPO Value ($B) Number of IPOs

* Base Year 1998 = 100Sources: Qatalyst Partners, Securities Data Company (All U.S. venture-backed IPOs of > $10MM

from 1978 through 1991)Dow Jones VentureSource (All U.S. venture-backed IPOs from 1992 through December 31, 2008)

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Source: Thomson Reuters, Dow Jones VentureSource

The Recent Realities of Venture-Backed M&As and IPOs

Longer Time to IPO and M&AMedian Age at IPO

Median Age at M&A

1998

4.54.5YearsYears

2008

9.69.6YearsYears

1998

33YearsYears

2008

6.56.5YearsYears

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The Death of the Under $50M IPO

*Data Includes Corporate IPOs as of 10/31/08. (Excludes Funds, REITs, SPACs and LPs).Source: Dealogic, Capital Markets Advisory Partners

Percent ofTotal IPOs

80% of IPOs Smaller than $50M

20% of IPOs Smaller than $50M

Transactions Raising $50M+

Transactions Raising Less Than $50M

0

10

20

30

40

50

60

70

80

90

100

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008*

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Job Creation

IEcosystem

Partners

IIEnhanced Liquidity

Paths

IIITax

Incentives

IVRegulation

VC Industry U.S. Government

Innovation

NVCA 4-Pillar Plan to Restore Liquidity in the U.S. Venture Capital Industry

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NVCA Plan: Pillar I – Ecosystem Partners

Job Creation

IEcosystem

Partners

IIEnhanced Liquidity

Paths

IIITax

Incentives

IVRegulation

VC Industry U.S. Government

InnovationI-BanksI-Banks

AccountingAccountingFirmsFirms

ExchangesExchanges

Law FirmsLaw Firms

VC FirmsVC Firms

EntrepreneursEntrepreneurs

EcosystemPartners

Buy SideBuy Side

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Size of IPO Offering ($MM)1

NO MAN’S LANDNO MAN’S LAND

IPOs not IPOs not AppropriateAppropriate

$25 $50 $75 $100$0

$100

$200

$300

$400

$500

A Vacuum Exists for Small, Medium-Size Company IPOs

1: Assuming 25% of Company Sold in IPO

Implicit Post-IPO Company Valuation($MM)

Boutique banks needed to help cover unserved areas

I

21st Century Versions of “4 Horsemen” Required21st Century Versions of “4 Horsemen” Required

Would You Consider a Boutique I-Bank To Be the

Lead Book Runner for Going Public on a U.S.

Stock Exchange?*

* Source: DCM Analysis / Survey of Venture-Backed Companies, 2009 – Participants (N) = 108

36%Yes

32%No

32%Not Sure

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15 Out of 21 Recent IPOs Led by Major I-Banks 15 Out of 21 Recent IPOs Led by Major I-Banks and Big 4 Accounting Firmsand Big 4 Accounting Firms

Major I-Banks and Big 4 Accounting Firms Dominate U.S. IPOs

Source: NVCA, Thomson Reuters

I-Bankat IPO

Audit Firm at IPO

Recent VC-Backed IPOs

IPO1

IPO2

IPO3

IPO4

IPO5

IPO6

IPO7

IPO8

IPO9

IPO10

IPO11

IPO12

IPO13

IPO14

IPO15

IPO16

IPO17

IPO18

IPO19

IPO20

IPO21

Investment Bank

IPO Managed by Major I-Banks

IPO Managed by Boutique Bank Only

Audit Firm

Traditional Big 4

Traditional Non-Big 4IPO Co-Managed by Boutique and Major I-Banks

I

Nov. 2007 Feb. 2009

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NVCA Recommends Use of New Terminology “The Global Six” in Describing Major International Accounting Organizations Qualified to

Support Venture-Backed Portfolio Companies

Recent Research Performed by Capital Markets Advisory Partners Recent Research Performed by Capital Markets Advisory Partners (an Independent Advisory Firm) and Validated by the Above Six Firms, Shows (an Independent Advisory Firm) and Validated by the Above Six Firms, Shows All Six Organizations Have Created Global Accounting Networks Operating in All Six Organizations Have Created Global Accounting Networks Operating in

More than 90 Countries Worldwide.*More than 90 Countries Worldwide.*

Accounting Firms Examined More Closely

● KPMG LLP● PricewaterhouseCoopers LLP ● BDO Seidman LLP

● Deloitte LLP● Ernst & Young LLP● Grant Thornton LLP

The Global SixThe Global Six

* Source: “Which Audit Firms are Accepted by Wall Street?A Reference Guide by Capital Markets Advisory Partners, 2009, Version 1.0

I

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NVCA Promoting Alternate Ecosystem Partners

Investment Banks● NVCA Organizing Workshops

With Boutique Banks and Large I-Banks to Identify and Address Needs of Emerging Growth Companies

Accounting Firms● NVCA Meeting with “Global Six”

Accounting Firms to Discuss Needs of VC-backed Companies and Ways To Provide Better Worldwide Support

FacilitateFacilitate

EncourageEncourage

● NVCA Encourages Joint Book Running (Major Bank and Boutique Bank Partnership) with Fee Sharing as a Desirable Practice

● NVCA Encourages Obtaining Bids From Global Six and Non-Global Six Accounting Firms as Desirable Practice in IPO Planning

NVCA Actions Can Create More Competitive EcosystemNVCA Actions Can Create More Competitive Ecosystem

I

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Other Ecosystem Partner RecommendationsI

● I-Banks and VCs need to cultivate and nurture new buyers / funds specializing in venture IPOs

● Accounting Firms encouraged to provide lower-cost services to IPO candidate portfolio companies

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NVCA Plan: Pillar II – Enhanced Liquidity Paths

Job Creation

IEcosystem

Partners

IIEnhanced Liquidity

Paths

IIITax

Incentives

IVRegulation

VC Industry U.S. Government

Innovation

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Current Liquidity Mechanisms

Distribution System Is BrokenDistribution System Is Broken

● Too Many Companies Below Critical Mass

● Too Few Transformative Companies

SellersSellers(Portfolio Companies)(Portfolio Companies)

PublicPublicMarket BuyersMarket Buyers

(Institutional/Strategic)(Institutional/Strategic)

● Public Market Jitters● Short Selling Increases

Market Volatility● Minimum Bite Size● Due Diligence Burden

II

● Restricted Analyst and I-Banker Collaboration

● Undergoing Massive Organizational Changes

Current I-BanksCurrent I-Banks

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Enhanced Liquidity Mechanisms

● In Addition to Major I-Banks we Need Innovative Boutique Banks Serving Emerging Growth Companies

● Use of New Private Market Platforms– InsideVenture

– PORTAL Alliance (NASDAQ) Enhancements

– SecondMarket

– Xchange

– Other

● Additional Use of Global Financing / Fundraising and International Stock Exchanges

II

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Enhanced Liquidity Mechanisms – Example

● Access to Long-Term Investors

● Accelerated Fund Raising

SellersSellers(Portfolio Companies)(Portfolio Companies)

PublicPublicMarket BuyersMarket Buyers

(Institutional/Strategic)(Institutional/Strategic)

● Pre-Screened Deal Flow● Efficient Due Diligence● Increased Visibility

New Platforms Will Increase VC Ecosystem LiquidityNew Platforms Will Increase VC Ecosystem Liquidity

● VC-Backed Private Market Platform● Enforced Membership Criteria

– Last Round of Financing $20-200MM– Seeking to Go Public in 6-18 Months

● In-House Vetting Process,Including Company Information Portal, Conferences

New Liquidity PlatformsNew Liquidity Platforms

II

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NVCA Enhanced Liquidity Mechanism Recommendations

• Venture Firms Encouraged to Pro-actively Explore M&A Roll-Up of Smaller Portfolio Companies to Achieve IPO Critical Mass

III. Pro-Active M&AIII. Pro-Active M&A

• Venture Firms Encouraged to Use Enhanced Liquidity Mechanisms Such as InsideVenture and Others

I. Liquidity PlatformsI. Liquidity Platforms

• Raise Rounds From Global Financing Sources

• Explore Global M&A• Explore IPOs on Intl.

Stock Exchanges• Consider Longer Lock-

Ups to Increase Demand for Venture-Backed IPOs

II. Portfolio CompaniesII. Portfolio Companies

II

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NVCA Plan: Pillar III – Tax Incentives

Job Creation

IEcosystem

Partners

IIEnhanced Liquidity

Paths

IIITax

Incentives

IVRegulation

VC Industry U.S. Government

Innovation

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NewNew

● Adopt New Tax Incentive to Stimulate IPOs

– One Time Only

– 10% Capital Gains Tax Rate for IPO Purchaser and Investors

– Only Applicable for Holding Periods > 2-3 Years

● Consider a Longer Holding Period for Long-Term Capital Gains

Special IPO Program Will Increase Government Revenues

NVCA Pro-Growth Taxation RecommendationsIII

PreservePreserve

● Keep Long-Term Capital Gains Tax Rate Globally Competitive

● Preserve Meaningful Differential Between Ordinary Income andLong-Term Capital Gains Tax Rates

● Promote Tax Incentives for Venture Capital Investments of Certain Types and Sizes (e.g. Cleantech, Life Sciences)

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NVCA Plan: Pillar IV – Regulation

Job Creation

IEcosystem

Partners

IIEnhanced Liquidity

Paths

IIITax

Incentives

IVRegulation

VC Industry U.S. Government

Innovation

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Barriers to Going Public on U.S. Stock Exchanges

Exit Route Preferenceand Expectation

(n=108)

Top 3 Barriers to Going Public# of Responses Answered as a Top 3 Issue

(Participants = 108)

M&A

IPO

Compliance Requirements (Sarbanes-Oxley, Audit, Governance)

Increased Volatility in the Public Markets

M&A Better Alternative (Faster Process, More Liquidity)

Investment-Banking Related Issues (Analyst Coverage, Requires High Rev Threshold)

Transaction Costs of Going Public (Legal, Banker Fees, Non-Compliance Related Costs)

Higher Perceived Litigation Risk from U.S. Investor Base

Other

Source: DCM Analysis/Survey of Venture-Backed Companies, 2009

Current Regulation Has a Major Impact on How Current Regulation Has a Major Impact on How Emerging Companies Consider their Exit RouteEmerging Companies Consider their Exit Route

IV

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● Reduce Fraud● Restore Confidence

● Eliminate I-Bank Conflict of Interest

● Equal Information Access for All Investors

● Faster Development of Private Placements

● Prohibitively Expensive for Small Companies● Extended Time to IPO● M&A More Attractive

● Sell Side Analyst Exodus● Reduced Analyst Coverage and

Aftermarket Support

● Communication Gap Grows Between Small Caps and Potential Buyers

● Restrictions Limit Usefulness

Original Intent Unintended ImpactRegulations

Uncoordinated Regulations Severely Harm Small Companies

SarbanesSarbanesOxleyOxley

““Spitzer Spitzer Decree”Decree”

Reg. FairReg. FairDisclosureDisclosure

Rule 144ARule 144A

Regulations Need Updating to Eliminate Regulations Need Updating to Eliminate Unintended ConsequencesUnintended Consequences

IV

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Pre-IPOPre-IPO Post-IPOPost-IPO Private PlacementPrivate Placement

NVCA Recommendations for Regulatory Changes

• Permit À La Carte Disclosure System

• Permit Confidential Registration Filings

• Phase in SOX 404 Requirement For Small Companies

• Permit Research Analysts to Better Collaborate with Both the Issuer and Investment Bankers During the IPO Process

• Relax Financial Statement Requirements

• Suspend Minimum Market Cap Requirements

• Prohibit Short Sales of Newly Issued Company Shares for at Least 12 Months

• Expand Usage of Form S-3 to Enable Offerings Beginning 90 Days Post IPO

• Eliminate Restrictions on Use ofS-3 for Certain Primary Offerings of Non-accelerated Filers

• Revise Requirement for Obtaining Shareholder Approval to Sell Securities Below Market or Book Value

• Educate CFOs on Reg FD Restrictions and Allowances

• 144A – Expand Definitions of Qualified Institutional Buyers

• 144A – Relax Requisite Holding Periods and Volume Restrictions

• NASDAQ/Portal Alliance – Open It Up to Private Companies and Accredited Investors

NVCA Requests Full SEC Review of Recent Laws NVCA Requests Full SEC Review of Recent Laws to Streamline Small Company IPO Processto Streamline Small Company IPO Process

IV

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NVCA 4-Pillar Plan Summary

Job Creation

IEcosystem

Partners

IIEnhanced Liquidity

Paths

IIITax

Incentives

IVRegulation

VC Industry U.S. Government

Innovation

• Adopt New Tax Incentive to Stimulate IPOs: One Time Only

• Keep Long-Term Capital Gains Rate Competitive• Promote Tax Credits for VC Investments of Certain

Types/Sizes (e.g. Cleantech)• Consider Longer Holding Period for Long-Term capital Gains

• Use New Platforms for Linking Buyers and Sellers (Like InsideVenture)

• Encourage Use of Global Funding Sources for New Rounds, M&A and IPOs

• Utilize Pro-Active M&A to Achieve Critical Mass

• Request Full SEC Regulatory Review to Streamline Small Company IPO Process

• Eliminate Harmful Spitzer Settlement Provisions

• Relax SOX 404 Compliance Restrictions and Permit Optional Extended Lock-ups

• Expand usability of NASDAQ PORTAL Alliance to private companies and accredited investors

• Stimulate Ecosystem Competition : I-banks (Majors/Boutiques), Law Firms, Acctg. Firms (Global Six - Lower Costs)

• Encouraging Joint Book Running with Shared Economics

• Cultivate New Buyers / Funds for IPOs

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NVCA Expresses Its Appreciation● The NVCA Board of Directors● Hassan Ahmad, Sonus Networks ● Mike Brooks, Venrock● Stuart Cable, Goodwin Procter● James L. Callinan, RS Investments● Frank Currie, Partner, Davis Polk & Wardwell● Scott Cutler, NYSE Euronext ● Ash Dahod, Starent Networks● Mona DeFrawi, InsideVenture● Paul Deninger, Jefferies & Co. ● Susan Page Estes, Global VC Coverage, UBS

AG● Irwin Federman, USVP● Leslie Wolff Golden, Ridgewood Capital● Bob Grady, The Carlyle Group● Bill Hambrecht, W.R. Hambrecht + Co.● Felda Hardymon, Harvard Business School

● Harry W. Kellogg, Jr., Silicon Valley Bank● Stan Lapidus, Helicos ● Bob McCooey NASDAQ● Michael Millman, JP Morgan● Chuck Newhall, NEA● Duncan Niederauer, NYSE Euronext ● Sandy Robertson, Robertson Stephens● James D. Robinson III, RRE Ventures● Bill Schnoor, Goodwin Procter● Antoinette Schoar, MIT ● Larry Sonsini, Wilson Sonsini Goodrich & Rosati ● David Topper, JP Morgan ● Brian Truesdale, Deutsche Bank● David Weild, Markets Advisory Partners● Thom Weisel, Thomas Weisel Partners ● Rian Wren, Neutral Tandem

Thanks to DCM, Highland Capital Partners, the NYSE Thanks to DCM, Highland Capital Partners, the NYSE and Wilson Sonsini for their generosity in hosting the and Wilson Sonsini for their generosity in hosting the

Blue Ribbon dinnersBlue Ribbon dinners

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Thank You