peter moran perspectives from the venture world leaders for manufacturing conference
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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 - PowerPoint PPT PresentationTRANSCRIPT
Confidential and Proprietary
Peter MoranPerspectives from the Venture World
Leaders for Manufacturing ConferenceOctober, 23 2003
Confidential and Proprietary
Thoughts from Venture WorldThoughts from Venture World
Gaining lift off “Wild West” to “Exciting East” LFMs in Start-ups
Confidential and Proprietary
Thoughts from Venture WorldThoughts from Venture World
Gaining lift off – What is Venture Capital– Venture Trends– Reaching Escape Velocity
“Wild West” to “Exciting East” LFMs in Start-ups
Confidential and Proprietary
Thoughts from Venture WorldThoughts from Venture World
Gaining lift off – What is Venture Capital– Venture Trends– Reaching Escape Velocity
“Exciting East” LFMs in Start-ups
Confidential and Proprietary
Venture Capital as an Asset ClassVenture Capital as an Asset Class
Public stocks Public bonds
Venture Capital Buyout/Mezzanine
Private Equity
Portfolio
Real Estate
Asset Class
Fund of Funds
Family Offices
Advisors
PensionFunds
UniversityEndowments
Corporate Treasury
High WealthIndividuals
BanksInsurance
Companies
Fund Source
Confidential and Proprietary
“Venture Capital Is …”Depends upon where you stand
Investment Capital Leadership & contacts Economic development Commercializer Innovation engine Job creator Research magnet
Confidential and Proprietary
Importance of US VC Industry – Big PictureImportance 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
Confidential and Proprietary
Job Creation by Startups in the USAJob Creation by Startups in the USA
48%< 20 Employees
24%>500 Employees
68%<20 Employees
22%20-499
Employees
10%>500
Employees
Share of Net New JobsShare of Growth in
number of Companies
Major Source of Job Creation from Hi-Tech Start-ups 1990-1995
Source: Small Business Administration from Bureau of Census
28%20-499
Employees
Confidential and Proprietary
Venture funded firms
12.5 million employees
Annual revenues of $1.1 trillion
Source: DRI-WEFA (analysis as of 8/2001)
Impact of Venture CapitalImpact of Venture Capital
Represent9.7% of US payroll
11% of US GDP6.7% of US co revenue
Confidential and ProprietarySource: DRI-WEFA (analysis as of 8/2001)
Venture Impact, Cont.Venture Impact, Cont.
Venture Investment1970-1999
For $1
For $22K
ImpactIn 2000
$9 in Revenue
1 job
Confidential and Proprietary
R&D Spending - Top 15 Global IT PlayersR&D Spending - Top 15 Global IT Players
Acquisitions of innovative start-ups substitute for R&D of large companies
Acquisitions of innovative start-ups substitute for R&D of large companies
1991 2002
R&D as % of Market Cap
Source: DCM Research
5%10%R&D as % of Market Cap
Confidential and Proprietary
Venture by StateVenture by State
California 1,400 Texas 676 Pennsylvania 425 Massachusetts 381 New York 369 Georgia 338 Washington state 264 New Jersey 260
Source: DRI-WEFA 2001 study
Venture Backed Jobs (000s)
*Tennessee 382
California 270 Texas 158 Pennsylvania 58 Massachusetts 49 New York 66 Georgia 63 Washington State 75 New Jersey 38
Venture Backed Revenue ($B)
Confidential and Proprietary
Thoughts from Venture WorldThoughts from Venture World
Gaining lift off – What is Venture Capital– Venture Trends– Reaching Escape Velocity
“Exciting East” LFMs in Start-ups
Confidential
Venture Capital ExplosionVenture Capital Explosion
1% US GDP
Sub 0.2% US GDP
$ M
illi
on
In
vest
ed
Source: PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree™
Commitment to US Venture Capital
Confidential
10,00010,000
1,8001,800
900900
1,5001,500
5,800
($100 BInvestedCapital)
5,800
($100 BInvestedCapital)
CompaniesFunded
CompaniesRemaining
Acquired
TakenPublic
Shut Down
The OverhangThe Overhang
Confidential
Source: VentureOne/Ernst & Young
1996
2003 Investment Continues to Fall2003 Investment Continues to Fall
1997 1998 1999 2000 2001 2002 1H03
Am
ou
nt
Inve
sted
($B
)
$0
$25
$50
$75
$100
0
1,000
2,000
3,000
4,000
5,000
6,000
Nu
mb
er of D
eals
866
2156
3112
4502
25202198
1901
Deal Flow and Equity into Venture-Backed Companies (Annual)
$9.9 $13.1$17.8
$49.2
$93.9
$35.4
$20.3
$7.5
Amount Invested ($B) Number of Deals
Confidential and Proprietary
Amount Invested $M
VC Funding Bottoms?VC Funding Bottoms?
Source: VentureSource
2001 2002 2003Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
1st Growth in 6 Quarters
2001 2002 2003Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
# of Financing Rounds
Confidential and Proprietary
Source: VentureOne
1993 1997 1998 1999 2000 2001 2002 1H03$0
$15
$20
$25
$8.5
Median Premoney Valuation by Year
Valuations at Mid-’90s LevelsValuations at Mid-’90s LevelsM
edia
n P
rem
on
ey V
alu
atio
n (
$M)
$30
$10
$5
199619951994
$10.7 $9.5$11.2
$12.6$15.5
$22.0
$26.0
$16.8
$10.5 $10.0
Confidential and Proprietary
Equity Investment by Industry SectorEquity Investment by Industry Sector
0%
20%
40%
60%
80%
100%
2Q00 4Q00 2Q01 4Q01 2Q02 4Q02 2Q03
Products &Services
InformationTechnology
Healthcare
% o
f In
vest
men
t
Source: VentureOne/Ernst & Young
Confidential and Proprietary
Source: VentureOne
Am
ou
nt
Pai
d (
$B)
$0 0
25
50
75
100
125 Nu
mb
er of T
ransactio
ns
125
$45.7
$23.8
$11.8
Amount Paid ($B) Number of Transactions
M&A Opportunities Stable in 2Q’03M&A Opportunities Stable in 2Q’03
Transactions and Amount Paid in M&As
$30
$40
$50
$20
$10
1Q00 3Q002Q00 4Q00 2Q011Q01 3Q01 1Q024Q01 2Q02 4Q023Q02 2Q031Q03
$20.3
$7.5 $5.6 $4.9 $3.5 $1.9 $2.7 $3.2 $2.7 $2.3 $2.7
110116
103 104 10395 92 87
109
8683
6763
Confidential and Proprietary
Median Raised in Private Rounds ($M)
Source: VentureOne
$0 0
5
10
15
20
5.55.5$18.2$18.2
Median Amount Paid ($M)
$60
$80
$100
$40
$20
Not Much Profit in Current M&AsNot Much Profit in Current M&As
Median Amount Paid in M&As vs. Median Investedin Private Rounds Prior to M&A
Med
ian
Am
ou
nt
Pai
d (
$M)M
edian
Invested
in
Private R
ou
nd
s ($M)
1997 1998 1999 2000 2001 2002 1H031996
$19.7$19.7$26$26$100$100$55.2$55.2$31.1$31.1$34.3$34.3$40$40
5.75.77.07.0
11.311.3
10.410.4
14.714.7 15.415.4
21.021.0
Confidential and Proprietary
Source: VentureOne
Am
ou
nt
Rai
sed
($B
)
$0 0
20
40
60
Ven
ture-B
acked IP
Os
7070
$7.6
$3.5
$1.5
Amount Raised ($B) Venture-Backed IPOs
$10
$5
1Q00 3Q002Q00 4Q00 2Q011Q01 3Q01 1Q024Q01 2Q02 4Q023Q02 2Q031Q03
$6.7
$.5 $.3 $.2$.8 $.3 $.9 $.03 $.4
$0.00$.2
IPO Liquidity Remains Rare IPO Liquidity Remains Rare
Deals and Amount Raised Through IPOs
7171
4343
1818
55 44 44 88 44 9911 66
0022
Confidential and Proprietary
Nikkei at 19-Year LowNikkei at 19-Year Low
2003 11,025
19
Confidential
Equity Returns Annual Returns, PercentEquity Returns Annual Returns, Percent
As of 6/30/03Source: Thomson Venture Economics/NVCA
Early/Seed VC
All Venture
All Private Equity
NASDAQ
S&P 500
1 Year 5 Years 20 Years
-26.1 47.9 19.8
-27.4
-6.9
10.8
-1.5 -3.0
-3.1
6.1
24.2 16.1
13.8
12.7
11.6
Confidential and Proprietary
Thoughts from Venture WorldThoughts from Venture World
Gaining lift off – What is Venture Capital– Venture Trends– Reaching Escape Velocity
“Exciting East” LFMs in Start-ups
Confidential
Beating the Net Startup OddsBeating the Net Startup Odds
Totals from 1994 through first-quarter 2000Source: Estimates from The Standard based on data from VentureOne, Garage.com, primary research and venture capital firms
Went Public/Acquired
Received Venture Capital
Received Other Financing
Business Plans Shopped
1 in 833 business plans made it big
1 in 173 receive VC funding
2 in 10 ideas become business plans
Entrepreneurs with a big ideaEntrepreneurs with a big idea2.25 Million2.25 Million
500,000500,000
5-15,0005-15,000
3-5,0003-5,000
605605
Confidential and Proprietary
Early Stage Venture Investing Life Cycle 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)
Systematic, Long-Term Process ofRisk Reduction through each Phase
Confidential and Proprietary
Sometimes We Dismiss Great Tech OpportunitiesSometimes 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
Confidential and Proprietary
VC MindsetVC Mindset
“Venture capitalists make lemmings look like rugged individualists.”
– Mark F. Radcliffe, Gray Cary Ware & Freidenrich
Confidential and Proprietary
VC Mindset VC Mindset
Confidential and Proprietary
Thoughts from Venture WorldThoughts from Venture World
Gaining lift off – What is Venture Capital– Venture Trends– Reaching Escape Velocity
“Exciting East” LFMs in Start-ups
Confidential
A New Alarm BellA New Alarm Bell
U.S. Manufacturing Jobs Millions
2.7 million jobs lost in 3 years,
includes 400,000In High-Tech
… And It’s Not JustManufacturing Jobs!
Confidential and Proprietary
Emergence of “Exciting East”Emergence of “Exciting East”
Shanghai 2003Shanghai 1980s
Confidential and Proprietary
U.S. is Not Center of UniverseU.S. is Not Center of Universe
“Think Outside The Box”
Confidential and ProprietaryConfidential and Proprietary
2002
All Others
Western Europe
Asia (includes Japan)
USA
2007
34%34%
27%27%
27%27%
12%12%
Total $156B Total $166B
25%25%
34%34%
25%25%
16%16%
International: PC & Workstation MarketInternational: PC & Workstation Market
Source: IDC
Confidential and Proprietary
International: Network EquipmentInternational: Network Equipment
2003 2004 2005 2006 2007
Spending Growth Rates
25%
-5%
0%
5%
10%
15%
20%
USA
Asia Pacific(ex-Japan)
-2%
2%3%
9% 9% 9%11%
19%21%
18%
Source: IDC
Confidential and Proprietary
China Telecom Capex as % of US
China Telecom SpendingChina Telecom Spending
20%
Source: CSFB, MIT
28%
37%
46%
2000 2001 2002 2003
US Capex
China Capex
$136
$ 27
$119
$ 33
$68
$25
$54
$25
Confidential and Proprietary
China Communications OpportunityChina Communications Opportunity
Fastest growing telecom infrastructure CapEx
–14% wireline penetration
Fastest growing & largest wireless market
–190M subscribers 150M+ white collar
workers
–Rapid growth to 300M
Facts
WTO Beijing Olympics Break-up of China
Telecom Leapfrog deployments
–VoIP–Metro Ethernet–BB wireless
Local VCs emerging
Enablers
SelectiveOpportunitiesfor VentureInvestment
SelectiveOpportunitiesfor VentureInvestment
Confidential and Proprietary
Technology Companies with Significant Asian RevenueTechnology Companies with Significant Asian Revenue
Companies With Primary Listing in U.S.(US $MM)
Company Market Value as of Apr. 23, 2002
UTStarcomNeatease.comSina.comSohu.comChinadotcomAsiaInfoASAT HoldingsRediffGigamediaPacific InternetKareo Thrunet
$ 2,332327339
245470212
175023
68
Market Value as of Sept. 18,2003
$ 3730 2020 1950 1460 1010 375 284 155 110 107 N/A
% Change
60%6213% 2571%3644% 312% -20% 34% 811% 120%365%
N/A
Confidential and Proprietary
Cost To Build a Semi CompanyCost To Build a Semi Company
US/Silicon Valley
China
Science/ Engineering
Grads
Avg. WageSemiconductor
Designer
Total investment to
build semi co. to cash flow
positive
480,000 465,000
$120k/yr $11-14k/yr
$35-45M $15-22M
Confidential and Proprietary
New Company Formation – Necessary ConditionsNew Company Formation – Necessary Conditions
Morgan Stanley Dean Witter & Co.
1980 – 2000 1995 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
YesYesYes
ComingNoYes
Yes++Coming
YesYesNoNo
2000
YesNoYesNoNoYesYesNoNo
StartingNoNo
USA PRC
Confidential and Proprietary
Summary of Common Investment Hypotheses for ChinaSummary of Common Investment Hypotheses for China
Technology Localization
Political Risks
Only 300-400 million Only 300-400 million addressable marketaddressable market
Technology Innovation
Legal / Fin.Structures
MarketSize
Chinese Partners and Chinese Partners and customers are increasing customers are increasing
acceptance of foreign acceptance of foreign brands and goods brands and goods
Several key Several key technologies are being technologies are being deployed first in Chinadeployed first in China
Have succumbed to Have succumbed to partnering route to partnering route to
market in select casesmarket in select cases
Billions, billions Billions, billions everywhereeverywhere
Local distribution and Local distribution and local functionality are local functionality are necessary for entrynecessary for entry
Burdens of size stifle Burdens of size stifle innovation or early innovation or early adoption in Chinaadoption in China
The Party will not let The Party will not let anybody else in to the anybody else in to the
countrycountry
The legal system is The legal system is terrible and structures terrible and structures are unstable at bestare unstable at best
Some of the unstable Some of the unstable structures are working. structures are working. Genuine commitment.Genuine commitment.
The bottom impose The bottom impose a heavy taxa heavy tax
The Urban Myth is still The Urban Myth is still largely TRUElargely TRUE
Get the right Get the right technologies / all the technologies / all the other risks still applyother risks still apply
Will pretend to want to Will pretend to want to partner and will end up partner and will end up building – a la MSFTbuilding – a la MSFT
Is still weaker than Is still weaker than more developed more developed
countries.countries.
Urban Myth Truth Caution
Confidential and Proprietary
Silicon Valley VC Concerns Over Investing in ChinaSilicon 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
Confidential and Proprietary
Political Risk - SummaryPolitical Risk - Summary
Source: The Economist
Confidential and Proprietary
Case Study: SMIC – Semiconductor FabCase 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
Confidential
Shortage:528K 8” wafersper month
Shortage:528K 8” wafersper month
Domestic IC supply shortage is expected to be doubled by 2006Domestic IC supply shortage is expected to be doubled by 2006
Source: Dataquest (2002), CSFB Estimates
2000
Domestic IC Supply Lags Far Behind DemandDomestic IC Supply Lags Far Behind Demand
2001 2002 2003 2004
Shortage:1,087K 8” wafers per month – approx. the capacity of 30 8” fabs or 12 12” fabs
Shortage:1,087K 8” wafers per month – approx. the capacity of 30 8” fabs or 12 12” fabs
0
200
400
600
800
1,000
1,200
1,400
1,600
# o
f 8"
Waf
ers
per
Mo
nth
('0
00)
SupplyDemand
’02-’06 Wafer Demand CAGR: 24.5%
Confidential
Record Fab Ramp UpRecord Fab Ramp Up
33
Source: JPMorgan estimates, company reportsNote: SMIC’s wafers are 8”, TSMC’s wafers were 6”, UMC’s wafers were 4”
1980-1987
SMIC TSMC UMC
55
77
1987-19922000-2003
# of Years to Reach Capacity of 45,000 Wafers/Month
33
1980-1993
SMIC TSMC UMC
66
1313
1987-19932000-2003
# of Years to Reach US $300M Revenues
Reach Critical Scale in Just 3 Years
2000 2001 2002April May June Sept.
15 Months
SMICIncorporated
Construction of Fab 1 begins
Fab 1 begins production
Confidential and Proprietary
Good ReadingGood Reading
Confidential and Proprietary
Thoughts from Venture WorldThoughts from Venture World
Gaining lift off – What is Venture Capital– Venture Trends– Reaching Escape Velocity
“Exciting East” LFMs in Start-ups
Confidential and Proprietary
Know Your GoalsKnow Your Goals
Fortune Fame Family Fervor Friends
Confidential and Proprietary
FortuneFortune
Confidential and Proprietary
Know Your AudienceKnow Your Audience
What VCs Look For– People– Big outcome potential– Sustainable, competitive advantages– Ability to attract future financing
Remember – Fear & Greed
Confidential and Proprietary
GreedGreed
Confidential and Proprietary
Entrepreneur Fundraising IssuesEntrepreneur Fundraising Issues
What are VCs expectations? Can you meet them? Raising $ - a sales situation!! Valuation negotiation strategy Succinct, compelling, realistic bizplan Management team, advisor pedigrees Due diligence your target VCs
Confidential and Proprietary
Manufacturing Matters– Domain expertise: Optiant, ECnet, I2– Functional Expertise: Procket, Layer 7
Marketing, Sales & Engineering often Matter More Expertise & Experience Matter Most
LFM Careers in Start-UpsLFM Careers in Start-Ups
Confidential and Proprietary
Fortune . . . Fortune . . .
- William Shakespeare
“Fortune always will confer an aura,Of worth, unworthily; and in this worldThe lucky person passes for genius”
“Fortune brings in some boats that are not steered”- William Shakespeare
DCM OverviewDCM Overview
Founded in 1996 to invest in early-stage communications & Internet infrastructure, application software/service, and end-user content/service opportunities.
Experienced partners from Accel, Apple, Arrow Electronics, Bain, Cisco, Hewlett-Packard, IBM, Intuit, KPMG, New Era of Networks (NEON), McKinsey, Silicon Graphics, and Sun Microsystems.VINTAGE Committed NUMBER OF
YEAR FUND Capital INVESTMENTS
1996/7 DCM I $51M 18
1999 DCM II $155M 20
2000 DCM III $471M 28
Confidential
DCM OverviewDCM Overview
Early-stage communications, software, and services investments Experienced team from: Accel, Apple, Arrow Electronics, Bain,
Cisco, F5, Goldman Sachs, HP, IBJ, IBM, Intuit, KPMG, NEON, McKinsey, Silicon Graphics, Sun Microsystems, and USWest.
DCM Partners Track RecordDCM Partners Track Record
Public:
Private/Acquired:
DCM Investment ProfileDCM Investment Profile
75% early-stage companies, 25% strategic late-stageMajority of early stage deals are seed stage
Typically lead or co-lead investorTaking a Board of Directors seat in 80% or more of the deals
Total investment in any one deal generally up to $15MTypical initial investment $3-$6M; reserves of 125-150% for early stage deals
Seed round investments as low as $0.5M
Active EIR programs feed into seed stage deals
Peter MoranLeaders for Manufacturing Conference
October, 23 2003